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EX-32.1 - EXHIBIT 32.1 - China Housing & Land Development, Inc.v230679_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - China Housing & Land Development, Inc.v230679_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - China Housing & Land Development, Inc.v230679_ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - China Housing & Land Development, Inc.v230679_ex32-2.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ________________ to _______________

000-51429
(Commission file number)

CHINA HOUSING & LAND DEVELOPMENT, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
 
20-1334845
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer Identification
No.)

6 Youyi Dong Lu, Han Yuan 4 Lou
Xi'An, Shaanxi Province
China 710054
(Address of principal executive offices)

86-029-8258-2632
(Issuer's telephone number)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x
   
(Do not check if a smaller
reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x

The number of shares of Common Stock outstanding on August 8, 2011 was 35,078,639 shares.

Except as otherwise indicated by the context, references in this Form 10-Q to:
 
“CHLN,” the “Company,” “we,” “our,” or “us” are references to China Housing & Land Development, Inc.
 
“U.S. Dollar,” “$” and “US$” mean the legal currency of the United States of America.
 
“RMB” means Renminbi, the legal currency of China.
 
“China” or the “PRC” are references to the People’s Republic of China.
 
“U.S.” is a reference to the United States of America.
 
“SEC” is a reference to the Securities & Exchange Commission of the United States of America.
 
“GFA” means gross floor area.
 
 
 

 
 
CHINA HOUSING & LAND DEVELOPMENT, INC.
 
Index
 
 
   
Page
Number
 
PART I
FINANCIAL INFORMATION
     
         
Item 1.
Financial Statements
    3  
           
 
Interim Condensed Consolidated Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010
    3  
 
Interim Condensed Consolidated Statements of Income (Loss) for the three and six months ended June 30, 2011 and 2010 (unaudited)
    4  
 
Interim Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2011 and 2010 (unaudited)
    5  
 
Interim Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2011 and 2010 (unaudited)
    6  
 
Interim Condensed Consolidated Statements of Shareholders’ Equity as at June 30, 2011 (unaudited) and December 31, 2010
    7  
           
 
Notes to Interim Condensed Consolidated Financial Statements (unaudited) June 30, 2011 and 2010 and December 31, 2010
    8  
           
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
    19  
           
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
    42  
           
Item 4.
Controls and Procedures
    42  
           
PART II.
OTHER INFORMATION
    43  
           
Item 1.
Legal Proceedings
    43  
           
Item 1A.
Risk Factors
    43  
           
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
    43  
           
Item 3.
Defaults Upon Senior Securities
    43  
           
Item 4.
(Removed and reserved)
    43  
           
Item 5.
Other Information
    43  
           
Item 6.
Exhibits
    43  
           
SIGNATURES
    44  
           
EX-31.1
(Certifications required under Section 302 of the Sarbanes-Oxley Act of 2002)
       
           
EX-31.2
(Certifications required under Section 302 of the Sarbanes-Oxley Act of 2002)
       
           
EX-32.1
(Certifications required under Section 906 of the Sarbanes-Oxley Act of 2002)
       
           
EX-32.2
(Certifications required under Section 906 of the Sarbanes-Oxley Act of 2002)
       
 
 
2

 

PART I. FINANCIAL INFORMATION
 
Item 1. Financial Statements

CHINA HOUSING & LAND DEVELOPMENT, INC. AND SUBSIDIARIES

Interim Condensed Consolidated Balance Sheets
As of June 30, 2011 (Unaudited) and December 31, 2010

   
June 30,
   
December 31,
 
   
2011
   
2010
 
 ASSETS
           
Cash and cash equivalents
 
$
72,693,792
   
$
46,904,161
 
Cash - restricted
   
40,163,129
     
34,756,450
 
Accounts receivable, net of allowance for doubtful accounts of $272,121 and $266,493, respectively
   
11,645,849
     
9,297,505
 
Other receivables, prepaid expenses and other assets, net
   
4,819,554
     
7,653,925
 
Real estate held for development or sale
   
136,496,753
     
104,586,550
 
Property and equipment, net
   
30,109,786
     
29,735,836
 
Advance to suppliers
   
1,771,850
     
1,223,366
 
Deposits on land use rights
   
64,292,684
     
74,938,729
 
Intangible assets, net
   
52,834,718
     
51,846,410
 
Goodwill
   
1,845,064
     
1,806,905
 
Deferred financing costs
   
327,384
     
401,703
 
Total assets
 
417,000,563
   
363,151,540
 
                 
LIABILITIES
               
Accounts payable
 
$
25,957,225
   
$
22,542,083
 
Advances from customers
   
69,551,520
     
52,229,189
 
Accrued expenses
   
3,025,094
     
2,507,638
 
Payables for acquisition of businesses
   
92,572
     
2,363,385
 
Income and other taxes payable
   
12,163,584
     
15,429,752
 
Other payables
   
6,536,097
     
5,663,222
 
Loans from employees
   
12,052,294
     
8,787,879
 
Loans payable
   
104,898,559
     
82,971,074
 
Deferred tax liability
   
14,577,897
     
14,344,712
 
Warrants liability
   
27,949
     
2,766,382
 
Fair value of embedded derivatives
   
565,494
     
2,027,726
 
Convertible debt
   
8,722,132
     
16,251,840
 
Mandatorily redeemable noncontrolling interests in Subsidiaries
   
41,255,994
     
33,535,969
 
Total liabilities
   
299,426,411
     
261,420,851
 
                 
SHAREHOLDERS' EQUITY
               
Common stock: $.001 par value, authorized 100,000,000 shares
               
issued and outstanding 35,078,639 and 32,685,331, respectively
   
35,079
     
32,685
 
Additional paid in capital
   
48,768,781
     
38,996,078
 
Common stock subscribed
   
-
     
59,606
 
Statutory reserves
   
6,654,715
     
6,654,715
 
Retained earnings
   
44,572,890
     
41,528,907
 
Accumulated other comprehensive income
   
17,542,687
     
14,458,698
 
Total shareholders’ equity
   
117,574,152
     
101,730,689
 
                 
Total liabilities and shareholders' equity
 
$
417,000,563
   
$
363,151,540
 
 
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
 
 
3

 

CHINA HOUSING & LAND DEVELOPMENT, INC. AND SUBSIDIARIES

Interim Condensed Consolidated Statements of Income (Loss)
For The Three and Six Months Ended June 30, 2011 (Unaudited) and 2010

   
3 Months
   
3 Months
   
6 Months
   
6 Months
 
   
June 30, 2011
   
June 30, 2010
   
June 30, 2011
   
June 30, 2010
 
REVENUES
 
 
   
 
   
 
   
 
 
Real estate sales
  $ 15,573,256     $ 35,220,386     $ 35,230,073     $ 67,611,447  
Other income
    4,678,936       1,373,409       7,579,815       2,555,262  
Total revenues
    20,252,192       36,593,795       42,809,888       70,166,709  
                                 
COST OF SALES
                               
Cost of real estate sales
    13,150,640       25,691,338       27,789,214       52,253,225  
Cost of other revenue
    1,987,855       576,854       4,184,424       1,113,627  
Total cost of revenues
    15,138,495       26,268,192       31,973,638       53,366,852  
                                 
Gross margin
    5,113,697       10,325,603       10,836,250       16,799,857  
                                 
OPERATING EXPENSES
                               
Selling, general, and administrative expenses
    3,321,725       3,758,565       6,754,441       6,296,449  
Stock based compensation
    17,820       -       17,820          
Other expenses
    348,901       65,381       390,478       188,032  
Interest expense
    365,460       447,475       962,608       954,500  
Accretion expense on convertible debt
    206,813       345,926       543,804       675,108  
Total operating expenses
    4,260,719       4,617,347       8,669,151       8,114,089  
                                 
NET INCOME FROM BUSINESS OPERATIONS
    852,978       5,708,256       2,167,099       8,685,768  
                                 
CHANGES IN FAIR VALUE OF DERIVATIVES
                               
Loss on extinguishment of debt
    -       2,180,492       -       2,180,492  
Change in fair value of embedded derivatives
    (409,478 )     (1,307,129 )     (1,462,232 )     (1,873,335 )
Change in fair value of warrants
    (263,623 )     (2,242,663 )     (1,114,274 )     (2,797,264 )
 Total changes in fair value of derivatives
    (673,101 )     (1,369,300 )     (2,576,506 )     (2,490,107 )
                                 
Income before provision for income taxes and noncontrolling interest
    1,526,079       7,077,556       4,743,605       11,175,875  
                                 
Provision for income taxes
    985,101       1,531,461       1,771,590       2,540,992  
Recovery of deferred income taxes
    (33,922 )     (21,851 )     (71,968 )     (50,997 )
Net income for the period
    574,900       5,567,946       3,043,983       8,685,880  
                                 
Charge to noncontrolling interest
    -       -       -       (14,229,043 )
                                 
NET INCOME (LOSS) ATTRIBUTABLE TO CHINA HOUSING & LAND DEVELOPMENT, INC.
  $ 574,900     $ 5,567,946     $ 3,043,983     $ (5,543,163 )
                                 
WEIGHTED AVERAGE SHARES OUTSTANDING
                               
Basic
    35,078,639       33,065,386       34,485,897       32,824,416  
                                 
Diluted
    36,694,348       35,302,785       36,101,606       34,752,732  
                                 
NET INCOME (LOSS) PER SHARE
                               
Basic
  $ 0.02     $ 0.17     $ 0.09     $ (0.17 )
                                 
Diluted
  $ 0.01     $ 0.13     $ 0.05     $ (0.20 )

The accompanying notes are an integral part of these interim condensed consolidated financial statements.
 
 
4

 

CHINA HOUSING & LAND DEVELOPMENT, INC. AND SUBSIDIARIES

 Interim Condensed Consolidated Statements of Comprehensive Income (Loss)
For The Three and Six Months Ended June 30, 2011 (Unaudited) and 2010
 
   
3 Months
   
3 Months
   
6 Months
   
6 Months
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
NET INCOME FOR THE PERIOD
 
$
574,900
   
$
5,567,946
   
$
3,043,983
   
$
8,685,880
 
                                 
OTHER COMPREHENSIVE INCOME
                               
Gain in foreign exchange
   
1,721,118
     
834,531
     
3,083,989
     
806,847
 
                                 
Less: COMPREHENSIVE INCOME
   
2,296,018
     
6,402,477
     
6,127,972
     
9,492,727
 
                                 
Less: Comprehensive loss
   attributable to noncontrolling interest
   
-
     
-
     
-
     
(14,229,043
)
                                 
Comprehensive income (loss) attributable to
China Housing & Land Development, Inc.
 
2,296,018
   
$
6,402,477
   
$
6,127,972
   
$
(4,736,316
)

The accompanying notes are an integral part of these interim condensed consolidated financial statements.
 
 
5

 
 
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARIES
Interim Condensed Consolidated Statements of Cash Flows
For The Six Months Ended June 30, 2011 (Unaudited) and 2010
 
   
June 30,
   
June 30,
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income for the period
  $ 3,043,983     $ 8,685,880  
Adjustments to reconcile net income to cash provided by (used in) operating activities:
               
Bad debt recovery
    (39,010 )     -  
Depreciation
    964,972       593,498  
Stock-based compensation
    17,820       -  
Gain on disposal of property and equipment
    (2,037,103 )     (23,292 )
Amortization of deferred financing costs
    77,391       77,391  
Amortization of intangible assets
    105,388       -  
Recovery of future income taxes
    (71,968 )     (50,997 )
Loss on extinguishment of debt
    -       2,180,492  
Change in fair value of embedded derivatives
    (1,462,232 )     (1,873,335 )
Change in fair value of warrants
    (1,114,274 )     (2,797,264 )
Accretion expense on convertible debt
    543,804       675,108  
(Increase) decrease in assets:
               
Accounts receivable
    (2,141,202 )     (2,554,513 )
Other receivable and prepaid expense
    2,524,381       (1,670,134 )
Real estate held for development or sale
    (29,485,375 )     4,205,242  
Advances to suppliers
    (518,634 )     9,424,848  
Deposit on land use rights
    12,077,576       (24,680,429 )
Increase (decrease) in liabilities:
               
Accounts payable
    2,927,500       (4,134,870 )
Advances from customers
    15,969,833       19,230,257  
Accrued expenses and interests
    7,445,026       5,615,440  
Other payable
    730,536       207,410  
Income and other taxes payable
    (3,115,928 )     3,204,854  
Net cash provided by operating activities
    6,442,484       16,315,586  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Change in restricted cash
    (4,590,644 )     (73,606 )
Purchase of property and equipment
    (1,640,547 )     (970,673 )
Cash acquired from acquisition of business
    -       2,179  
Proceeds from sale of property and equipment
    2,941,767       -  
Net cash used in investing activities
    (3,289,424 )     (1,042,100 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Loans from banks
    30,399,757       31,491,680  
Payments on loans payable
    (10,065,376 )     (15,678,807 )
Loans from or repayment to employees, net
    3,062,757       1,956,931  
Repayment of payables for acquisition of businesses
    (2,279,982 )     (2,022,431 )
Net cash provided by (used in) financing activities
    21,117,156       15,747,373  
                 
INCREASE IN CASH AND CASH EQUIVALENTS
    24,270,216       31,020,859  
                 
Effects on foreign currency exchange
    1,519,415       432,272  
                 
CASH AND CASH EQUIVALENTS, beginning of period
    46,904,161       36,863,216  
                 
CASH AND CASH EQUIVALENTS, end of period
  $ 72,693,792     $ 68,316,347  
 
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
 
 
6

 
 
CHINA HOUSING & LAND DEVELOPMENT, INC. AND SUBSIDIARIES

Interim Condensed Consolidated Statements of Shareholders’ Equity
As of June 30, 2011(Unaudited) and December 31, 2010
 
   
Common Stock
   
Common
   
Additional
                Accumulated      
   
Shares
   
Par
Value
   
stock
subscribed
   
paid
in capital
   
Statutory
reserves
   
Retained
earnings
   
Comprehensive
Income
   
Totals
BALANCE, December 31, 2010
    32,685,331     $ 32,685     $ 59,606     $ 38,996,078     $ 6,654,715     $ 41,528,907     $ 14,458,698     $ 101,730,689  
Common stock issued for stock-based compensation
    20,625       21       (59,606 )     59,585       -       -       -       -  
Common stock issued for warrant exercise
    619,905       620       -       1,623,539       -       -       -       1,624,159  
Common stock issued for conversion of convertible debt
    1,752,778       1,753       -       8,071,759       -       -       -       8,073,512  
Net income for the period
    -       -       -       -       -       2,469,083       -       2,469,083  
Foreign currency translation adjustment
    -       -       -       -       -       -       1,362,871       1,362,871  
BALANCE, March 31, 2011
    35,078,639     $ 35,079     $ -     $ 48,750,961     $ 6,654,715     $ 43,997,990     $ 15,821,569     $ 115,260,314  
Net income for the period
    -       -       -       -       -       574,900       -       547,900  
Stock based compensation
    -       -       -       17,820       -       -       -       17,820  
Foreign currency translation adjustment
    -       -       -       -       -       -       1,721,118       1,721,118  
BALANCE, June 30, 2011
    35,078,639     $ 35,079     $ -     $ 48,768,781     $ 6,654,715     $ 44,572,890     $ 17,542,687     $ 117,574,152  

The accompanying notes are an integral part of these interim condensed consolidated financial statements.
 
 
7

 
 
CHINA HOUSING & LAND DEVELOPMENT, INC. AND SUBSIDIARIES
Notes to Interim Condensed Consolidated Financial Statements
June 30, 2011 and 2010 (Unaudited) and December 31, 2010

Note 1 – Organization and Basis of Presentation
 
China Housing & Land Development, Inc., (the “Company”) is a Nevada corporation, originally incorporated on July 6, 2004 under the name Pacific Northwest Productions Inc., (“Pacific”). On May 5, 2006, the Company changed its name to China Housing & Land Development, Inc. The Company, through its subsidiaries, is engaged in acquisition, development, management, and sale of commercial and residential real estate properties located primarily in Xi’an, Shaanxi Province, People’s Republic of China (PRC or China).

The accompanying unaudited interim condensed consolidated financial statements include the accounts of the Company and its subsidiaries, Xi’an Tsining Housing Development Company Inc. (“Tsining”), Xi’an New Land Development Co. (“New Land”), Manstate Assets Management Limited (“Manstate”), Success Hill Investments Limited (“Success Hill”), Puhua (Xi’an) Real Estate Development Co., Ltd. (“Puhua”), Xi’an Xinxing Property Management Co., Ltd. (“Xinxing Property”), Suodi Co., Ltd. (“Suodi”), Shaanxi Xinxing Construction Co., Ltd. (“Xinxing Construction”), Xinxing FangZhou Housing Development Co., Ltd. (“FangZhou”), Wayfast Holdings Limited (“Wayfast”), Clever Advance Limited (“Clever Advance”), Gracemind Holdings Limited (“Gracemind”) and Treasure Asia Holdings Limited (“Treasure Asia”)  (collectively, the “Subsidiaries”). Wayfast with its 100% subsidiary - Clever Advance and Gracemind with its 100% subsidiary - Treasure Asia were incorporated as holding companies in March 2009 and they were inactive during the six months ending June 30, 2011.

In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments necessary for a fair statement of the Company’s interim condensed consolidated balance sheets as at June 30, 2011 and the Company’s interim condensed consolidated statements of income (loss) and comprehensive income (loss) for the three and six months ended June 30, 2011 and 2010 and the Company’s interim condensed consolidated statements of cash flows for the six months ended June 30, 2011 and 2010. These adjustments consist of normal recurring items. The results of operations for any interim period are not necessarily indicative of results for the full year.

The unaudited interim condensed consolidated financial statements are based on accounting principles that are consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (“2010 Annual Report”); except as disclosed below. They do not include certain footnote disclosures and financial information normally included in annual consolidated financial statements prepared in accordance with GAAP and, therefore, should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s 2010 Annual Report.

Accounting Principles Recently Adopted

In April 2010, the FASB issued FASB Accounting Standard Update (“ASU”) No. 2010-13 “Compensation—Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades”. ASU 2010-13 updates ASC 718 to codify the consensus reached in EITF Issue No. 09-J, “Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades”. ASU 2010-13 clarifies that share-based payment awards with an exercise price denominated in the currency of a market in which a substantial portion of the underlying equity security trades should not be considered to meet the criteria requiring classification as a liability. ASU No. 2010-13 became effective for the Company on January 1, 2011. The adoption of this ASU did not have a material impact on the Company’s interim condensed consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20 “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” which expands the disclosure requirements concerning the credit quality of an entity’s financing receivables and its allowance for credit losses. ASU No. 2010-20 became effective for the Company on January 1, 2011. The adoption of this ASU did not have a material impact on the Company’s interim condensed consolidated financial statements.
 
In December 2010, the FASB issued ASU 2010-28 “when to perform step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts”. The FASB amended the existing guidance to modify Step 1 of the goodwill impairment test for a reporting unit with a zero or negative carrying amount. Upon adoption of the amendment, an entity with a reporting unit that has a carrying amount that is zero or negative is required to assess whether it is more likely than not that the reporting unit’s goodwill is impaired. If the entity determines that it is more likely than not that the goodwill of the reporting unit is impaired, the entity should perform Step 2 of the goodwill impairment test for the reporting unit. Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any goodwill impairments occurring after the initial adoption of the amendment should be included in earnings. ASU No. 2010-28 became effective for the Company on January 1, 2011. The adoption of this ASU did not have a material impact on the Company’s interim condensed consolidated financial statements.
 
 
8

 

Note 1 – Organization and Basis of Presentation - continued

Accounting Principles Recently Adopted - continued
 
In December 2010, the FASB issued ASU 2010-29 “Disclosure of supplementary pro forma information for business combinations”. The FASB amended the existing guidance to require a public entity, which presents comparative financial statements, to disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendment also expanded the required supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination, which are included in the reported pro forma revenue and earnings. ASU No. 2010-29 became effective for the Company on January 1, 2011. The adoption of this ASU did not have a material impact on the Company’s interim condensed consolidated financial statements.
 
Foreign exchange rates used:
 
   
June 30,
2011
   
December 31,
2010
   
June 30,
2010
 
Period end RMB/U.S. Dollar exchange rate
    6.4635       6.6000       6.7815  
Average RMB/U.S. Dollar exchange rate
    6.4990       6.7690       6.8238  
 
Note 2 – Mandatorily Redeemable Preferred Stock and Noncontrolling Interest

The Company recorded accretion cost on the mandatorily redeemable noncontrolling interest using the effective interest method based on effective interest rate of 45%. The related accretion cost incurred for the three and six months ended June 30, 2011 were $3,649,005 and $6,928,374, respectively (2010 - $4,557,102 and $8,708,484) and was capitalized in real estate construction in progress.
 
   
Mandatory Redeemable Noncontrolling Interests
 in Subsidiaries
 
Mandatory redeemable noncontrolling interests in subsidiaries at December 31, 2010
 
$
33,535,969
 
Capitalized accretion cost on mandatorily redeemable noncontrolling interests in subsidiaries
   
6,928,374
 
Difference in foreign exchange translation
   
791,651
 
Mandatorily redeemable noncontrolling interests in subsidiaries at June 30, 2011
 
 $
41,255,994
 

The mandatory redemption schedules are as follow:

Date
 
$
 
December 31, 2011
   
30,942,988
 
December 25, 2012
   
27,229,829
 
Total
 
$
58,172,817
 
 
Note 3 – Supplemental Disclosure of Cash Flow Information

Income taxes paid amounted to $3,369,377 and $73,273 for the six months ended June 30, 2011 and 2010, respectively. Interest paid for the six months ended June 30, 2011 and 2010 amounted to $7,187,357 and $5,926,071, respectively.

Note 4 – Other Receivables, Prepaid Expenses and Deposits

Other receivables and prepaid expenses consisted of the following at June 30, 2011 and December 31, 2010:

   
June 30,
2011
   
December 31,
2010
 
Other receivables
 
$
1,202,939
   
$
3,223,089
 
Allowance for bad debts
   
(141,431
   
(177,392
Prepaid expenses
   
526,976
     
194,389
 
Prepaid other tax expenses
   
3,231,070
     
4,413,839
 
Other receivables and prepaid expenses
 
$
4,819,554
   
$
7,653,925
 
 
 
9

 

Note 5 – Real Estate Held for Development or Sale

The following summarizes the components of real estate inventories as at June 30, 2011 and December 31, 2010:
 
 
 
June 30,
2011
   
December 31,
2010
 
Real estate projects completed and held for sale
           
Junjing I project
 
$
3,677,773
   
$
4,012,179
 
JunJing II project
   
1,907,620
     
3,389,501
 
Tsining 24G project
   
43,731
     
621,238
 
Gangwan project
   
36,854
     
96,245
 
Tsining Home IN project
   
58,742
     
57,527
 
Real estate completed and held for sale
   
5,724,720
     
8,176,690
 
                 
Real estate projects held for development
               
Puhua project
   
98,286,214
     
85,107,643
 
Tangdu project
   
4,587,133
     
4,495,490
 
Junjing III project
   
16,969,885
     
2,569,084
 
Park Plaza project
   
2,555,135
     
2,013,116
 
JunJing II project phase two (completed as at June 30, 2011)
   
-
     
847,697
 
Golden Bay project
   
7,429,297
     
826,948
 
Other projects
   
461,030
     
415,152
 
Construction materials
   
483,339
     
134,730
 
Real estate held for development
   
130,772,033
     
96,409,860
 
                 
Total real estate held for development or sale
 
$
136,496,753
   
$
104,586,550
 
 
Interest on debt and accretion costs on mandatorily redeemable noncontrolling interest in subsidiaries incurred by the Company for the three and six months ended June 30, 2011 was $5,909,027 and $13,861,202 (2010 - $6,106,626 and $12,103,413). The Company capitalized $5,567,180 in construction in progress during the three months ended June 30, 2011 (2010 -$5,698,060), and the Company capitalized $12,937,954 in construction in progress during the six months ended June 30, 2011 (2011 - $11,226,349).

Note 6 – Property and Equipment

Property and equipment consisted of the following at June 30, 2011 and December 31, 2010:
 
   
June 30,
2011
   
December 31,
2010
 
Income producing properties and improvements
 
 $
28,960,378
   
 $
28,000,452
 
Buildings and improvements
   
4,292,573
     
4,945,393
 
Head office under construction
   
847,722
     
-
 
Electronic equipment
   
477,643
     
445,578
 
Vehicles
   
476,009
     
466,165
 
Computer software
   
197,664
     
179,318
 
Office furniture
   
91,944
     
141,655
 
Total
   
35,343,933
     
34,178,561
 
Accumulated depreciation
   
(5,234,147
   
(4,442,725
Property and equipment, net
 
$
30,109,786
   
$
29,735,836
 
 
Depreciation expense for the three months ended June 30, 2011 and 2010 amounted to $482,388 and $300,364, respectively. Depreciation expense for the six months ended June 30, 2011and 2010 amounted to $964,972 and $593,498. The depreciation expense was included in the selling, general and administrative expenses.
 
 
10

 
 
Note 7 – Intangible Assets

Intangible assets consist of the following at June 30, 2011 and December 31, 2010:

   
June 30,
2011
   
December 31,
2010
 
Development right acquired (a)
 
$
49,963,417
   
$
48,930,082
 
Land use right acquired (b)
   
8,315,981
     
8,143,992
 
Construction license acquired (c)
   
1,164,720
     
1,140,632
 
     
59,444,118
     
58,214,706
 
Accumulated amortization
   
(6,609,400
   
(6,368,296
Intangible assets, net
 
$
52,834,718
   
$
51,846,410
 

(a)
The development right for 487 acres of land in Baqiao Park was obtained through the acquisition of New Land in fiscal 2007. The intangible asset has a finite life. The development right was originally scheduled to expire on June 30, 2011. The Company was able to extend the right to June 30, 2016 on November 25, 2010.

(b)
The land use right was acquired through acquisition of Suodi. The land use right certificate will expire in November, 2048. The Company amortizes the land use right over 39 years (37 years remaining).

(c)
The construction license was acquired through acquisition of Xinxing Construction. The construction license, which is subject to be renewed every 5 years, is not amortized and has an indefinite estimated useful life because management believes the Company is able to continuously renew the license in the future. The license was subject to renewal on March 10, 2011. The Company successfully renewed the license to December 31, 2015 during the period.
 
For the three and six months ended June 30, 2011, the Company has recorded $53,016 and $105,388 of amortization expense of the land use right (2010 - $Nil and $Nil). The amortization was included in selling, general and administrative expenses. There was no amortization of the development right during the three and six months ended June 30, 2011 and 2010.
 
 Note 8 – Accrued Expenses

   
June 30,
2011
   
December 31,
2010
 
Accrued expenses
 
$
2,792,090
   
$
2,265,650
 
Accrued interest on loans
   
233,004
     
241,988
 
Total
 
$
3,025,094
   
$
2,507,638
 
 
Note 9 – Payable for Acquisition of Businesses
 
   
June 30,
2011
   
December 31,
2010
 
Payable to original shareholders of Xinxing Construction (i)
 
$
-
   
$
2,272,727
 
Payable to original shareholders of Suodi (ii)
   
92,572
     
90,658
 
Total
 
$
92,572
   
$
2,363,385
 
 

(i)  
The Company has fully repaid the purchase price of Xinxing Construction during the first quarter of fiscal 2011.

(ii)  
The payable to original shareholders of Suodi represents the remaining balance due to the original shareholders of Suodi assumed by the Company when acquiring Suodi. 
 
 
11

 
 
Note 10 – Loans from Employees
 
The Company has borrowed monies from certain employees to fund the Company’s construction projects. These unsecured loans bear interest at 20% per annum and are available to all employees.
 
Included in these loans are loans from the Company’s executives.
 
   
June 30,
2011
   
December 31,
2010
 
Chairman
 
$
773,575
   
$
757,576
 
Chief executive officer
   
309,430
     
303,030
 
Chief financial officer
   
232,072
     
227,273
 
   
$
1,315,077
   
$
1,287,879
 
 
Note 11 – Loans Payable

Bank loans represent amounts due to various banks. These loans generally can be renewed with the banks when they expire. Bankloans as of June 30, 2011 and December 31, 2010 consisted of the following:

   
June 30,
2011
   
December 31,
2010
 
Xi’an Rural Credit Union Zao Yuan Rd. Branch
               
Due July 2, 2011, annual interest is at 8.496 percent, secured by the Company’s Jun Jing Yuan I, Han Yuan and XinXing Tower projects
 
 $
2,784,869
   
 $
2,727,273
 
                 
Xinhua Trust Investments Ltd.
               
Due February 10, 2012, annual interest is at 10 percent, secured by the 24G project
   
23,207,240
     
22,727,273
 
                 
Commercial Bank Weilai Branch
               
Annual interest is prime with 30% increase, secured by the Company’s Jun Jing Yuan II Building Number 12 $309,430 is payable on August 29, 2011; $773,575 is payable on March 31, 2012; $773,575 is payable on June 30, 2012; and $618,859 is payable on July 23, 2012
   
2,475,439
     
4,090,909
 
                 
Bank of Beijing, Xi’an Branch
               
Due December 10, 2012, annual interest is at the prime rate of People’s Bank of China (6.31%) secured by the PuHua project with a minimum repayment of $7.6 million required by December 31, 2011.
   
15,471,494
     
22,727,273
 
                 
Xi’an Duqu Trust Bank
               
Due June 11, 2011, annual interest is at 9.18 percent, secured by the Company’s Junjing Yuan I properties
   
-
     
681,817
 
                 
JP Morgan International Bank Limited Brussels Branch
               
Due December 14, 2011, annual interest is at 1.2 percent, secured by $34,656,146 of restricted cash
   
30,016,529
     
30,016,529
 
                 
Tianjin Cube Equity Investment Fund Partnership
               
Due December 10, 2012, annual interest is 9.6 percent, secured by JunJing Yuan II Commercial Units
   
30,942,988
     
-
 
                 
Total
 
$
104,898,559
   
$
82,971,074
 
 
 
12

 
 
Note 11 – Loans Payable - continued

All loans are used to finance construction projects. All interest paid was capitalized and allocated to various real estate construction projects.
 
The loans payable balances were secured by certain of the Company’s real estate held for development or sale with a carrying value of $102,752,690 at June 30, 2011 (December 31, 2010 - $89,538,930) and certain buildings and income producing properties and improvements with a carrying value of $1,886,795 at June 30, 2011 (December 31, 2010 - $4,458,389). The weighted average interest rate on loans payable as at June 30, 2011 was 6.7% (December 31, 2010 – 5.5%).
 
The loans payable were also secured by certain real estate units sold to customers. The Company obtained consent from these customers that the Company does not have to remove the mortgage on such apartments or to register the transfer of the ownership of such apartments by the Company to the customers for the time being.
 
Note 12 – Fair Value of Financial Instruments

The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of the measurement date, June 30, 2011, and the basis for that measurement, by level within the fair value hierarchy:

Fair Value Measurements Using
 
Assets/Liabilities
   
   
Level 1
   
Level 2
   
Level 3
   
At Fair Value
 
Warrants liability
 
 $
-
   
$
27,949
   
 $
-
   
$
27,949
 
Fair value of embedded derivatives
   
-
     
565,494
     
-
     
565,494
 
Total
 
 $
-
   
$
593,443
   
 $
-
   
$
593,443
 

The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis as of the measurement date, December 31, 2010, and the basis for that measurement, by level within the fair value hierarchy:
 
Fair Value Measurements Using
 
Assets/Liabilities
 
   
Level 1
   
Level 2
   
Level 3
   
At Fair Value
 
Warrants liability
 
$
-
   
$
2,766,382
   
$
-
   
$
2,766,382
 
Fair value of embedded derivatives
   
-
     
2,027,726
     
-
     
2,027,726
 
Total
 
-
   
$
4,794,108
   
 $
-
   
$
4,794,108
 

Note 13 – Convertible Debt
 
On January 28, 2008, the Company issued Senior Secured Convertible Debt due in 2013 (the “Convertible Debt”) and warrants to subscribe for common shares for an aggregate purchase price of $20 million. Both the warrant and embedded conversion option associated with the Convertible Debt meet the definition of a derivative instrument according to the standard “Accounting for Derivative Instruments and Hedging Activities”. Because the warrant and the convertible debt are denominated in U.S. dollars but the Company’s functional currency is the Chinese RMB, the exemption from derivative instrument accounting provided by the standard is not available and therefore the warrant and embedded conversion option are recorded as a derivative instrument liability and periodically marked-to-market.

On June 10, 2010, the Company and the Investors entered into an amendment (the “Amendment”), which grants investors the right to convert the $11 million non-convertible portion of the Convertible Debt. The right expires 5 business days after the effective date that a registration statement is filed by the Company registering the shares to be issued on the conversion. The warrants issued in 2008 were amended as well to permit the investors to exercise the warrants on a cashless basis and receive one common share for every two warrants held if the investor converts at least 55% of face amount of Convertible Debt held.

On January 25, 2011, certain investors requested and the Company’s Board approved the certain Investors to convert $9,763,000 of convertible debt into 1,752,783 common shares with related warrants exercised on a two to one cashless basis. The conversion was effective on February 16, 2011. Since the Company’s registration statement became effective during the period, the rights to convert the $11 million non-convertible portion of the Convertible Debt and to exercise the warrants on a cashless basis and receive one common share for every two warrants expired.
 
 
13

 
 
Note 13 – Convertible Debt - continued

The fair values of the warrants and embedded conversion option at June 30, 2011 were determined to be $6,111 and $565,494, respectively (December 31, 2010 - $1,920,097 and $2,027,726), using the Cox-Ross-Rubinstein Binomial (“CRR”) Model with the following assumptions:

   
June 30,
2011
   
December 31,
2010
 
Expected life
 
1.59 – 1.67 years
   
0.16 - 2.16 years
 
Expected volatility
   
65
%
   
95% - 100
%
Risk-free interest rate
   
0.34% - 0.36
%
   
0.11 - 0.68
%
Dividend yield
   
0
%
   
0
%

For the three months ended June 30, 2011, the Company recorded a decrease in fair value for the warrants and embedded derivatives of $47,389 and $409,478, respectively (June 30, 2010 – decrease of $1,592,546 and $1,307,129). For the six months ended June 30, 2011, the Company recorded a decrease in fair value of the warrants and embedded derivatives of $289,926 and $1,462,232, respectively (June 30, 2010 - $2,100,478 and $1,873,335), in the interim condensed consolidated statements of income (loss).

The carrying value of the Convertible Debt is accreted to its stated amount on maturity using the effective interest method. The effective interest rate was determined to be 15.42%. The carrying value of Convertible Debt on June 30, 2011 was $8,722,132 (December 31, 2010 - $16,251,840). Related interest and accretion costs for the three months ended June 30, 2011 were $129,384 and $206,813, respectively (June 30, 2010 - $263,671 and $345,926), and for the six months ended June 30, 2011 were $319,721 and $543,804, respectively (June 30, 2010 - $527,099 and $675,108).
 
Note 14 – Shareholders’ Equity

Common stock

1.  
As at December 31, 2010, the Company has accrued $59,606 of stock-based compensation to the independent directors as common stock subscribed. A total of 20,625 shares of common stock were issued during the first quarter of fiscal 2011.

2.  
The Company issued 619,905 shares of common stock for warrants exercised. The warrants were valued at $1,624,159 at the time of exercise.

3.  
The Company issued 1,752,778 shares of common stock for conversion of convertible debt. The convertible debt was valued at $8,073,512 at the time of exercise.

Warrants
 
Pursuant to accounting guidance, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settle in a Company’s Own Stock”, the warrants issued contain a provision permitting the holder to demand payment based on a valuation in certain circumstances. Therefore, the Company recorded the warrants issued through private placements in 2007 as a liability at their fair value on the date of grant and then revalued them to $21,838 at June 30, 2011 (December 31, 2010 - $846,285) using the CRR Binomial Lattice Model with the following assumptions:
 
   
June 31,
2011
   
December 31,
2010
 
Expected life
 
0.86 years
   
1.36 years
 
Expected volatility
   
60
%
   
70
%
Risk-free interest rate
   
0.16
%
   
0.40
%
Dividend yield
   
0
%
   
0
%

The gain from the change in fair value of warrants for the three months ended June 30, 2011 was $216,234 (June 30, 2010 – gain of $650,117), and the gain from the change in fair value of warrants for the six months ended June 30, 2011 was $824,348 (June 30, 2010 – gain of $696,786).

Including the fair value of warrants associated with the convertible debt (note 13), the total warrant liability as at June 30, 2011 was $27,949 (December 31, 2010 - $2,766,382). The total gain from the change in fair value of warrants for the three and six months ended March 31, 2011 was $263,623 and $1,114,274, respectively (June 30, 2010 - $2,242,663 and $2,797,264).
 
 
14

 

Note 14 – Shareholders’ Equity - continued

Warrants - continued

The following table provides information with respect to warrant transactions:
 
   
Number of
Warrants
Outstanding
   
Weighted 
Average
Exercise
Price
 
December 31, 2010
   
3,940,947
   
$
5.06
 
Exercised
   
(1,239,816)
     
6.07
 
Expired
   
-
     
-
 
June 30, 2011
   
2,701,131
   
$
4.59
 

The following summarizes the weighted-average information about the outstanding warrants as at June 30, 2011:
 
 
Outstanding Warrants
 
 
Exercise
Price
   
Number
   
Average Remaining
Contractual Life
 
  $ 4.50       2,539,416    
0.86 years
 
  $ 6.07       161,715    
1.67 years
 
  $ 4.59       2,701,131    
0.91 years
 
 
Stock Options

On June 13, 2011, the Company has granted options to acquire common stock of the Company to employees, officers and directors. The exercise price of the options was determined based on the fair value of the common stock at the grant date.

Options expire on the earlier of ten years from the issue date, subject to earlier termination resulting from an optionee’s death or departure from the Company or change of control. Unless otherwise determined by the Board of Directors, options granted vest as to 30%, 30% and 40% on each of the first, second and third anniversary dates of the option grants. The vesting is also subject to certain performance conditions on each vesting date.

The following table provides information with respect to stock option transactions:
 
   
Number of
Stock Options
Outstanding
   
Weighted 
Average
Exercise
Price
 
December 31, 2010
   
-
   
$
-
 
Granted
   
1,227,755
     
1.39
 
Expired
   
-
     
-
 
June 30, 2011
   
1,227,755
   
$
1.39
 

The following summarizes the weighted-average information about the outstanding stock options as at June 30, 2011:
 
 
Outstanding Stock Options
 
 
Exercise
Price
   
Number
   
Average Remaining
Contractual Life
 
  $ 1.39       1,227,755    
9.96 years
 
 
 
15

 
 
Note 14 – Shareholders’ Equity - continued

Stock-based compensation
 
The 1,227,755 stock options granted on June 13, 2011 have an estimated fair value of $1,316,911 for an average value of $1.04 to $1.10 per stock option using the CRR option pricing model with the following key assumptions:
 
   
June 13, 2011
 
Expected life
 
5.5 – 6.5 years
 
Expected volatility
   
95
%
Risk-free interest rate
   
1.74% - 2.10
%
Dividend yield
   
0
%
 
The expected life of options represents the period of time the granted options are expected to be outstanding. As the Company had not previously granted options, no historical exercising pattern could be followed in estimating the expected life. Therefore, the expected life was estimated as the average of the contractual term and the vesting period. The Company has not paid dividends in the past nor does it expect to pay dividends in the foreseeable future.
 
The Company does not believe any of the options will be forfeited because most of the stock options are granted to long-term employees and officers. In addition, since the performance condition will be set at a reasonably achievable level, the Company believes 100% of the performance conditions can be met.
 
Compensation expense for stock options is recognized over the vesting period. During the three and six months ended June 30, 2011, compensation expense of $17,820 (June 30, 2010 - $Nil) was recognized in the interim condensed consolidated statements of income.

Note 15 – Other Revenue
 
   
For the three
months ended
   
For the six
months ended
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Interest income
 
$
46,305
   
$
61,547
   
$
85,131
   
$
178,093
 
Rental income, net
   
275,043
     
530,038
     
862,320
     
840,938
 
Income from property management services
   
1,000,867
     
758,532
     
1,832,067
     
1,512,939
 
Miscellaneous construction contracts
   
1,327,770
     
-
     
2,763,194
     
-
 
Gain on disposal of property and equipment
   
2,028,951
     
23,292
     
2,037,103
     
23,292
 
 Total
 
$
4,678,936
   
$
1,373,409
   
$
7,579,815
   
$
2,555,262
 

Note 16 – Effect of Change in Estimate

Revisions in estimated gross profit margins related to revenue recognized under the percentage of completion method are made in the period in which circumstances requiring the revisions become known. These circumstances may include government fees, construction costs and infrastructure costs which were unknown to the management in the prior periods.

During the three and six months ended June 30, 2011, real estate development projects with gross profits recognized in the immediate preceding periods had changes in their estimated gross profit margins. As a result of these changes of gross profit, net income for the three and six months ended June 30, 2011 decreased by $3,917,007 and $5,220,023 (June 30, 2010 – increased by $225,505 and decreased by $1,819,657), respectively. Basic and diluted earnings per share for the three months ended June 30, 2011 decreased by $0.11 and $0.11, respectively (June 30, 2010 – increased by $0.01 and $0.01 per share). Basic and diluted earnings per share for the six months ended June 30, 2011 decreased by $0.15 and $0.15, respectively (June 30, 2010 – decreased by $0.06 and $0.05 per share).

Current period effect of change in estimate is due to the completion of the Company’s JunJing II project. Upon completion of the project, costs previously unknown to the Company were added to the final costs. The Company agreed to construct additional infrastructures which were not part of the original design of the project for the residents out of good faith and public relations. Certain government fees were incurred upon completion of the project. The fees initially waived by Xian local government during the construction stage were reinstated during the final inspection of the JunJing II project. The Company also agreed to pay for additional labor and material incurred by subcontractors.
 
 
16

 

Note 17 – Earnings (Loss) per Share
 
Earnings (Loss) per share for the three and six months ended June 30, 2011 and 2010 were determined by dividing net income (loss) attributable to China Housing & Land Development, Inc. for the periods by the weighted average number of both basic and diluted shares of common stock and common stock equivalents outstanding.

   
3 months
   
3 months
   
6 months
   
6 months
 
   
June 30, 2011
   
June 30, 2010
   
June 30, 2011
   
June 30, 2010
 
Numerator
                       
Net income (loss) attributable to China Housing & Land Development, Inc. – basic
 
$
574,900
   
$
5,567,946
   
$
3,043,983
   
$
(5,543,163
)
Effect of dilutive securities
                               
Warrants
   
-
     
35,937
     
-
     
35,937
 
Convertible debt
   
(202,665
   
(1,107,556
)
   
(1,066,269
   
(1,525,630
)
Income (loss) attributable to China Housing & Land Development, Inc. – diluted
 
$
372.235
   
$
4,496,327
   
$
1.977.714
   
$
(7,032,856
)
Denominator
                               
Weighted average shares outstanding – basic
   
35,078,639
     
33,065,386
     
34,485,897
     
32,824,416
 
Effect of dilutive securities
                               
Warrants
   
-
     
165,862
     
-
     
83,389
 
Convertible debt
   
1,615,709
     
2,071,537
     
1,615,709
     
1,844,927
 
Weighted average shares outstanding – diluted
   
36,694,348
     
35,302,785
     
36,101,606
     
34,752,732
 
Earnings (Loss) per share
                               
Basic earnings (loss) per share
 
$
0.02
   
$
0.17
   
$
0.09
   
$
(0.17
)
Diluted earnings (loss) per share
 
$
0.01
   
$
0.13
   
$
0.05
   
$
(0.20
)

All outstanding warrants have an anti-dilutive effect on the earnings per share and are therefore excluded from the determination of the diluted earnings per share calculations for the three and six months ended June 30, 2011.

Note 18 – Commitments and Contingencies

The Company leases part of its office and land for self use under various operating lease agreements with expiry dates between the years 2010 and 2041.
 
The Company is also committed to acquiring Shaanxi Bihu Property Development Co., Limited (“Bihu”). The remaining related purchase price to be paid within one year is approximately $9.5 million.
 
The Company also had various commitments related to a land use right acquisition with unpaid balances of approximately $22.0 million. The balances are not due until the vendor removes the existing building on the land and changes the zoning status of the land use right certificate. Based on the current condition, the Company estimates that the balances will be paid in two years.

All future payments required under the various agreements are summarized below.

   
Payment due by period
 
Commitments and Contingencies
 
Total
 
Less than
1 year
 
1-2 years
   
2-3 years
   
3-4 years
   
4-5 years
   
After
5 years
 
Operating leases
   
$
3,037,815
   
$
190,487
   
$
143,695
   
$
143,695
   
$
146,836
   
$
146,836
   
$
2,266,266
 
Acquisition (note 20)
     
9,545,912
     
9,545,912
     
-
     
-
     
-
     
-
     
-
 
Land use rights
     
19,749,954
     
19,749,954
     
-
     
-
     
-
     
-
     
-
 
Total
   
$
32,333,681
   
$
29,486,353
   
$
143,695
   
$
143,695
   
$
146,836
   
$
146,836
   
$
2,266,266
 
 
 
17

 
 
Note 19 – Related Party Transactions
 
One of the Company’s executive officers’ spouse owned 37.83% of common stock of Xi’an Xinxing Days Hotel & Suites (“Days Hotel”). During the three and six months ended June 30, 2011, the Company has incurred $56,408 and $87,714 fees to Days Hotel, respectively, (2010 - $Nil and $Nil). The Company also sold 14 apartments amounting to $695,439 to Days Hotel during the first quarter. No apartments were sold to Days Hotel during the second quarter. As at June 30, 2011, the Company has $112,619 (December 31, 2010 - $38,281) payable to Days Hotel.
 
Note 20 – Subsequent Events

1.  
The Company signed an Equity Transfer Agreement on February 28, 2011 with the shareholders of Bihu to acquire all outstanding common shares of Bihu. Bihu is located in Hu County, which is a satellite city located approximately 35 kilometers from Xi’an. The total purchase price is approximately $14.1 million (RMB 91.7 million). The Company transferred $4.6 million (RMB 30 million) into a restricted cash account for the acquisition on March 2, 2011. The remaining balance is to be paid within five business days after all the equity registrations are finalized with PRC government. However, because the sellers have been slow to fulfill their obligations, and the remaining balance has not yet been paid as planned, as at June 30, 2011, the registrations have not been finalized.

Due to the prolonged delay, the Company is considering abandoning the acquisition and seeking compensation based on the agreement signed.

2.  
The Company incorporated Ankang Tsining Jiyuan Real Estate Development Company Limited (“Jiyuan”) at the end of July 2011. Jiyuan is located in Ankang city which is about 380 kilometers from Xi’an and will focus on the residential property development in Ankang city.
 
 
18

 
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

Some of the statements contained in this Form 10-Q are not historical facts and are forward-looking statements, which can be identified by the use of terminology such as estimates, projects, plans, believes, expects, anticipates, intends, or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this Form 10-Q reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties, and other factors affecting our operations, market growth, services, products, and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events and conditions that may differ from the assumptions underlying the statements that have been made regarding anticipated events. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include without limitation: our ability to attract and retain management to integrate and maintain technical information and management information systems; our ability to raise capital when needed and on acceptable terms and conditions; the intensity of competition; and general economic conditions.

All written and oral forward-looking statements made in connection with this Form 10-Q that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements.

Critical Accounting Policies and Estimates

We prepare our interim condensed consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (i) the reported amounts of our assets and liabilities, (ii) the disclosure of our contingent assets and liabilities at the end of each reporting period and (iii) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these estimates based on our own experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are inherently uncertain. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.

When reading our interim condensed consolidated financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgment and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.

The unaudited interim condensed consolidated financial statements are based on accounting principles that are consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (“2010 Annual Report”). They do not include certain footnote disclosures and financial information normally included in annual consolidated financial statements prepared in accordance with GAAP and, therefore, should be read in conjunction with the audited consolidated financial statements and notes included in the Company's 2010 Annual Report.

Warrants and derivative liability

As of June 30, 2011, the Company has $27,949 of warrants liability and $565,494 of fair value of embedded derivatives on the balance sheet, representing approximately 0.01% and 0.19% of total liabilities, respectively.
 
We utilize the Cox-Rubinstein-Ross (“CRR”) Binomial Lattice Model to estimate the fair values of warrants liability and embedded derivatives. The CRR model depends on the following assumptions: the Company’s common stock price underlying the warrants; strike price; conversion price; expected life; expected volatility; risk free interest rate; and dividend rate. We used the CRR Binomial Lattice Model for the past 3 years and we do not expect any significant changes to assumptions except for the common share price and the expected volatility.
 
We estimate the fair value of warrants liability and embedded derivatives every quarter and recognize the change of fair value as gain or loss on our current quarter consolidated statement of income. The fair values of warrants liability and embedded derivatives have changed during the past few years according to the valuation models and the fair values are positively related to the market share price movement and the volatility.
 
 Prior to June 10, 2010, the date of Amendment of Convertible Debt, the Company used the CRR Binomial Lattice Model to assess the fair value of warrants and embedded derivatives at each reporting period. After the Amendment, since the investor could exercise the warrants on a cashless basis and receive one common share for every two warrants held, if the investor converts at least 55% of face amount of Convertible Debt held, in addition to the CRR Binomial Lattice Model, the Company also uses an alternative valuation method (the “Alternative Model”) to assess the fair value of the warrants. The Alternative Model is based on the share price of the Company at valuation date and the number of common shares that could result from the two for one cashless exercise. The Company records the warrant liability based on the higher valuation resulted from either CRR Binomial Lattice Model or Alternative Model at the valuation date.
 
 
19

 
 
Several investors converted a total of $9,763,000 face value of convertible debt and exercised the related warrants with the 2-to-1 cashless exercise feature added as part of the Amendment. Subsequently, the Company was able to charge $8,073,512 to convertible debt carrying and the fair value of the conversion features into shareholders’ equity. The fair value of $1,624,159 of the warrants on the day of exercise was also charged to shareholders’ equity.

After the conversion of the convertible debt and exercise of warrants as described above and 5 days after the effectiveness of the registration statement, the 2-to-1 cashless warrants conversion feature has expired for those investors who have not exercised their warrants. Therefore, the Alternative Model has been terminated.
 
During the three months ended June 30, 2011, our common stock price experienced fluctuations with the price decreasing from $1.90 on April 1, 2011 to $1.40 on June 30, 2011. The decrease in stock price caused a decrease in fair value for warrants liability and embedded derivatives. As a result, we recognized a change in fair value of warrants of approximately $0.26 million and a change in fair value of embedded derivatives of approximately $0.41 million, which are both non-cash gains.
 
The following table summarizes the fair value of warrant liability and embedded derivative as of June 30, 2011 and December 31, 2011.
 
   
June 30,
2011
   
December 31,
2010
 
Fair value of warrants liability
 
$
27,949
   
$
2,766,382
 
Fair value of embedded derivatives
 
$
565,494
   
$
2,027,726
 
 
The following tables summarize all the warrants and conversion option outstanding and the assumptions used for their valuations as of June 30, 2011 and December 31, 2011.
 
Investor Warrants:
 
6/30/2011
   
12/31/2010
 
Strike price
   
6.07
     
6.07
 
Market price
   
1.40
     
2.74
 
Valuation date
 
6/30/2011
   
12/31/2010
 
Expiry date
 
2/28/2013
   
2/28/2013
 
Volatility
   
65.00
%
   
100.00
%
Risk free rate
   
0.36
%
   
0.68
%
Option value
   
0.03779
     
0.97788
 
                 
# of warrants
   
161,715
     
1,401,531
 
                 
CRR Binomial Lattice Model Value
   
6,111
     
1,370,529
 
                 
Alternative value
               
# of shares if warrants converted two for one
   
N/A
     
700,765
 
Alternative value
   
N/A
     
1,920,097
 
                 
Warrants Value
   
6,111
     
1,920,097
 
 
Investor Warrants: 5-7-2007
 
6/30/2011
   
12/31/2010
 
Strike price
   
4.50
     
4.50
 
Market price
   
1.40
     
2.74
 
Valuation date
 
6/30/2011
   
12/31/2010
 
Expiry date
 
5/9/2012
   
5/9/2012
 
Volatility
   
60.00
%
   
70.00
%
Risk free rate
   
0.16
%
   
0.40
%
                 
Option value
   
0.00876
     
0.33322
 
                 
# of warrants
   
2,539,416
     
2,539,416
 
                 
Value
   
21,838
     
846,285
 
 
 
20

 
 
Conversion Option Valuation:
 
6/30/2011
   
12/31/2010
 
Strike price
   
5.57
     
5.57
 
Market price
   
1.40
     
2.74
 
Valuation date
 
6/30/2011
   
12/31/2010
 
Expiry date
 
1/28/2013
   
1/28/2013
 
Volatility
   
65.00
%
   
95.00
%
Risk free rate
   
0.34
   
0.11
%
Option value
   
0.04054
     
0.01800
 
                 
Host Value – principal
   
8,999,500
     
20,000,000
 
Host Value – interest
   
-
     
-
 
                 
Shares issuable on conversion
   
1,615,709
     
3,590,664
 
                 
Option value – principal
   
565,494
     
2,027,726
 
 
Real estate held for development or sale, intangible asset and deposits on land use rights

We evaluate the recoverability of our real estate developments taking into account several factors including, but not limited to, our plans for future operations, prevailing market prices for similar properties and projected cash flows.

We review real estate projects, whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. When these events occur, we measure impairment by comparing the carrying value to the estimated undiscounted future cash flows expected resulting from the use of the assets and their eventual disposition. If the total of the expected undiscounted cash flow is less than the carrying amount of the assets, we recognize an impairment loss based on the fair value of the assets.

Our significant judgments and estimates related to impairment include our determination if an event has occurred to warrant an impairment test. If a test is required, other significant judgments and estimates will include our expectations of future cash flows and the calculation of the fair value of the impaired assets.

When real estate costs are determined to be impaired, they are written down to their estimated net realizable value. The Company evaluates the carrying value for impairment based on the undiscounted future cash flows of the assets. Write-downs of real estate costs deemed impaired are recorded as adjustments to the cost basis. There has been no impairment on real estate inventories and no impairment loss has been recorded for the three months ended June 30, 2011 and 2010.

The following summarizes the components of real estate inventories as at June 30, 2011 and December 31, 2010:
 
 
June 30,
2011
   
December 31,
2010
 
Real estate projects completed and held for sale
           
Junjing I project
 
$
3,677,773
   
$
4,012,179
 
JunJing II project
   
1,907,620
     
3,389,501
 
Tsining 24G project
   
43,731
     
621,238
 
Gangwan project
   
36,854
     
96,245
 
Tsining Home IN project
   
58,742
     
57,527
 
Real estate completed and held for sale
 
$
5,724,720
   
$
8,176,690
 
                 
Real estate projects held for development
               
Puhua project
   
98,286,214
     
85,107,643
 
Tangdu project
   
4,587,133
     
4,495,490
 
Junjing III project
   
16,969,885
     
2,569,084
 
Park Plaza project
   
2,555,135
     
2,013,116
 
JunJing II project phase two (completed as at June 30, 2011)
   
-
     
847,697
 
Golden Bay project
   
7,429,297
     
826,948
 
Other projects
   
461,030
     
415,152
 
Construction materials
   
483,339
     
134,730
 
Real estate held for development
   
130,772,033
     
96,409,860
 
                 
Total real estate held for development or sale
 
$
136,496,753
   
$
104,586,550
 
 
 
21

 

Intangible asset

The intangible asset consists of the following at June 30, 2011 and December 31, 2010:

   
June 30,
2011
   
December 31,
2010
 
Development right acquired (a)
 
$
49,963,417
   
$
48,930,082
 
Land use right acquired (b)
   
8,315,981
     
8,143,992
 
Construction license acquired (c)
   
1,164,720
     
1,140,632
 
     
59,444,118
     
58,214,706
 
Accumulated amortization
   
(6,609,400)
     
(6,368,296)
 
Intangible assets, net
 
$
52,834,718
   
$
51,846,410
 
 

(a)   
The development right for 487 acres of land in Baqiao Park was obtained from the acquisition of New Land in fiscal 2007. The intangible asset has a finite life. The development right was originally scheduled to expire on June 30, 2011. The Company was able to extend the right to June 30, 2016 on November 25, 2010.

(b)   
The land use right was acquired through acquisition of Suodi. The land use right certificate will expire in November 2048. The Company amortizes the land use right over 39 years.

(c)   
The construction license was acquired through acquisition of Xinxing Construction. The construction license, which is subject to be renewed every 5 years, is not amortized and has an indefinite estimated useful life because management believes the Company will be able to continuously renew the license in the future. The license was subject to renewal on March 10, 2011. The Company successfully renewed the license through December 31, 2015 during the period.
 
For the three and six months ended June 30, 2011, the Company has recorded $53,016 and $105,388 of amortization expense on the land use right (2010 - $Nil and $Nil). The amortization was included in selling, general and administrative expenses. There was no amortization of the development right during the three and six months ended June 30, 2011 and 2010.

Deposits on land use rights
 
   
June 30,
2011
   
December 31,
2010
 
Deposits on land use rights
   
64,292,684
     
74,938,729
 
 
The decrease in deposits on land use rights was mainly due to reclassification of the deposits on land use rights of JunJing III project to real estate held for development or sale, as the Company completed a transaction to purchase the land use rights for the JunJing III project during the first quarter of 2011.

The Company conducts regular reviews of the deposits on land use rights. After review and assessment, the Company concluded that there was no significant decrease in the market price and therefore no impairment write-down was required. According to E-House (China) Real Estate Research Institute the average residential sale price in Xi’an city was stable in the fiscal quarter ended June 30, 2011. The average sale price decreased to 6,799 RMB per square meter (approximately US$1,046 per square meter) from 7,220 RMB (approximately US$1,097 per square meter) in the first quarter 2011, representing a decrease of 5.8 percent quarter-over-quarter.
 
Material trends and uncertainties that may impact continuing operations
 
Changes in national and regional economic conditions, as well as in areas where we conduct our operations and where prospective purchasers of our homes live, may result in more caution on the part of homebuyers resulting in fewer home purchases. According to data from the Xi’an Bureau of Statistics, Xi’an city’s real estate transaction volume (in terms of sq. meter signed) decreased about 20.6% in the second quarter of 2011 compared to the same period of 2010. All of our projects are currently in Xi’an city. During the second quarter of 2011, our sales of properties decreased approximately 55.8% over same period of 2010, which was mainly due to the fact that JunJing II project was substantially sold and new projects such as JunJing III and Park Plaza have not met all the revenue recognition criteria.

Virtually all purchasers of our homes finance their acquisitions through lenders providing mortgage financing. A substantial increase in mortgage interest rates or unavailability of mortgage financing would adversely affect the ability of prospective homebuyers to obtain the financing they need in order to purchase our homes, as well as the ability of prospective move-up homebuyers to sell their current homes. For example, if mortgage financing became less available, demand for our homes could decline. A reduction in demand could also have an adverse effect on the pricing of our homes because we (and our competitors) may reduce prices in an effort to compete for home buyers. A reduction in pricing could result in a decline in revenues and margins. Additional government policies were implemented by the local government in February 2011 to curb speculation in the real estate market. These new policies included capping year-over-year housing unit ASP increases to 15%, restricting third-time home purchases for local residents and second-time home purchases for non-local residents. These new policies could result in buying hesitation among potential new customers, which could impact our revenues.
 
 
22

 
 
The real estate development industry is capital intensive, requiring significant up-front expenditures to acquire land and begin development. Accordingly, we incur substantial indebtedness to finance our homebuilding and land development activities. Although we believe that internally generated funds and current borrowing capacity will be sufficient to fund our capital and other expenditures (including land acquisition, development and construction activities), the amounts available from such sources may not be adequate to meet our needs. If such sources are not sufficient, we would seek additional capital in the form of debt or equity financing from a variety of potential sources, including bank financing and/or securities offerings. The availability of borrowed funds, to be utilized for land acquisition, development and construction, may be greatly reduced, and the lending community may require larger amounts of equity to be invested by borrowers in a project in connection with new loans. Failure to obtain sufficient capital to fund planned capital and other expenditures could have a material adverse effect on our business.
 
In addition, regulatory requirements could force us to incur significant liabilities and operating expenses and could restrict our business activities. We are subject to statutes and rules regulating, among other things, certain developmental matters, building and site design, and matters concerning the protection of health and the environment. Our operating expenses may be increased by governmental regulations such as building permit allocation ordinances and impact and other fees and taxes, which may be imposed to defray the cost of providing certain governmental services and improvements. Any delay or refusal from government agencies to grant the necessary licenses, permits and approvals could have an adverse effect on our operations.
 
As of June 30, 2011, we had $72,693,792 of cash and cash equivalents, compared to $46,904,161 as of December 31, 2010, an increase of $25,789,631.
 
The Company believes that the combination of present capital resources, internally generated funds, and unused financing sources are more than adequate to meet cash requirements for the year 2011. We intend to meet our liquidity requirements, including capital expenditures related to the purchase of land for the development of future projects, through cash provided by operations and additional funds raised by future financings. Upon acquiring land for future development, we intend to raise funds to develop our projects by obtaining mortgage financing mainly from local banking institutions with which we have done business in the past. We believe that our relationships with these banks are in good standing and that our real estate will secure the loans needed. We believe that adequate cash will be available to fund our operations.

BUSINESS
 
Our Company
 
We are a leading residential developer with a focus on fast growing Tier II and Tier III cities in Western China. We are dedicated to providing quality and affordable housing to middle class families. The majority of our customers are first time home buyers and first time up-graders, who, we believe, will benefit from China’s rapid gross domestic product (“GDP”) growth and the middle classes’ corresponding increase in purchasing power.

We commenced operations in Xi’an in 1999 and have been considered to be one of the industry leaders and one of the largest private residential developers in the region. We have experienced significant growth in the past 12 years and have completed over 1.3 million square meters of residential projects. Through the utilization of modern design and technology, as well as a strict cost control system, we are able to offer our customers high quality, cost-effective products. Most of our projects are designed by world-class architecture firms from the United States, Canada and Europe who have introduced advanced “eco” and “green” technologies into our projects.
 
As we are focusing primarily on the demand from first time home buyers and first time up-graders in Western China, the majority of our apartments have sizes in the range of 70 square meters to 120 square meters; with such sizes considered to be a stable market section of the residential real estate market in Western China. Our typical residential project is approximately 100,000 square meters in size and consists of multiple high-rise, middle-rise and low-rise buildings as well as a community center, commercial units, educational facilities such as kindergartens and other auxiliary facilities. In addition, we provide property management services to our developments and have exclusive membership systems for our customers. We typically generate a large portion of our sales through the recommendations of our existing customers.

We acquire our land reserves and development sites through primary land development with the local government, open-market auctions and acquisition of old factories from the government and distressed assets from commercial banks. We do not depend on a single land acquisition method and this facilitates our acquisition of the land at a reasonable cost, which in turn results in our typically receiving higher returns on our investments from our developments. We intend to continue our expansion into other strategically selected cities in Western China by leveraging our brand name and scalable business model.
 
Our Strategies
 
We are primarily focused on the development, construction, and sale and management of residential real estate properties to capitalize on the rising demand for real estate from China’s emerging middle class. We strive to become the market leader in Western China and plan to implement the following specific strategies to achieve our goal:

Consolidate through Acquisition and Partnership. Currently, the residential real estate market in Western China is fragmented with many small players. We believe that this market fragmentation will provide us with opportunities for acquisitions or partnerships. We believe acquisitions will provide us better leverage in negotiations and better economies of scale.
 
 
23

 
 
Expand into Other Tier II and Tier III Cities. We believe our proven business model and expertise can be replicated in other Tier II and Tier III cities, especially in Western China. As such, we have identified certain cities that possess attractive replication dynamics.
 
Continue to Focus on the Middle Market. Since the middle class has growing purchasing power and, as a result of prevailing Chinese culture and values, a strong desire to own homes, we believe the demands for residential real estate from the emerging middle class will offer attractive opportunities to grow our Company. Thus, we plan to leverage our brand name, experience and design capabilities to meet these demands from the middle class.
 
Our Competitive Strengths

We believe we have the following competitive strengths which will enable us to compete effectively and to capitalize on the growth opportunities in our market:

Leading position in our market and industry
 
We are one of the largest private residential real estate developers in western China. We believe that we have strong design and sales capabilities as well as a well-regarded brand name in the region. Due to strong local project experience and long term relationships with the central and local governments, we have been able to acquire significant land assets at reasonable costs, thereby providing a strong pipeline of potential future business and revenues over the next three to five years.

Attractive market opportunity
 
The real estate market in western China has grown slower than that of eastern China. We believe the region is well positioned to grow at a faster rate for the next few years due to social, economic, regulatory and government stimulus-related factors. Our real estate sales have recovered from the 2008 economic downturn with growth from US$24,306,062 in 2008 to US$78,511,269 in 2009 to US$131,472,461 in 2010. Our business model has proven to be efficient and we plan to expand into other Tier II and Tier III cities in western China. Our growth strategy is focused on western China, and we believe we will significantly benefit from the Chinese government’s “Go West” policy, which encourages economic development and population movement to western China.
 
Unique and proven business model
 
Due to strong local project experience and long term working relationships with the central and local governments, we have been able to acquire land assets at more reasonable costs than our competitors. We are primarily focused on capitalizing on rising demand for properties from China’s emerging middle class, which has significant purchasing power and a strong demand for residential housing. In order to leverage our brand to appeal to the middle class, we use various advertising media to market our property developments and to reach our target demographic, including newspapers, magazines, television, radio, e-marketing and outdoor billboards. We believe that our brand is widely recognized in our market and known for high quality products at cost-effective prices.
 
Our Property Projects

We provide three fundamental types of real estate development products:

 
Ÿ 
High-rise apartment buildings, typically 19 to 33 stories, usually constructed of steel-reinforced concrete, that are completed within approximately 24 months of securing all required permits.

 
Ÿ 
Mid-rise apartment buildings, typically 7 to 18 stories, usually constructed of steel-reinforced concrete, that are completed within 12 to 18 months of securing all required permits.

 
Ÿ
Low-rise apartment buildings and villas, typically 2 to 6 stories, often constructed of steel-reinforced concrete, that are completed within approximately 12 months of securing all required permits.

Our projects can be classified into one of four stages of development:
 
 
Ÿ 
Projects in planning, which include projects for which we have purchased the development and or land use rights for parcels of land as part of our project development pipeline. The completion of projects on these sites is subject to adequate financing, approval of permits, receipt of licenses and certain market conditions;

 
Ÿ 
Projects in process, which include developments where we have typically secured the development and land use rights, and where the site planning, architecture, engineering and infrastructure work is in progress;

 
Ÿ 
Projects under construction, where the building construction has started but has not yet been completed; and

 
Ÿ 
Completed projects with units available for sale, where the construction has been finished and most of the units in the buildings have been sold or leased.

 
24

 

Projects under construction
 
Project
Name
 
Type of
Projects
 
Actual or
Estimated
Construction
Period
 
Actual or
Estimated 
Pre-sale
Commencement
Date
 
Total Site
Area
(m2)
 
Total
Gross
Floor Area
(m2)
 
Sold
GFA by
June 30, 2011
(m2)
Puhua Phase One
 
Multi-Family residential & Commercial
 
Q2/2010
- Q3/2011
 
Q4/2009
 
47,600
 
139,400
 
97,198
                         
Puhua Phase Two
 
Multi-Family residential & Commercial
 
Q2/2010
- Q3/2012
 
Q2/2010
 
47,300
 
263,191
 
55,706
 
Project
name
 
Total
Number of
Units
 
Number of
Units sold by
June 30, 2011
 
Estimated
Revenue
($million)
 
Contracted
Revenue by
June 30, 2011
($million)
 
Recognized
Revenue by
June 30, 2011
($million)
Puhua Phase One
 
840
 
701
 
125.8
 
82.1
 
55.6
                     
Puhua Phase Two
 
1,284
 
440
 
242.3
 
46.0
 
21.0
 
Puhua: The Puhua project, the Company’s 79 acre joint venture located in the Baqiao New Development Zone, has a total land area of 192,582 square meters and an expected GFA of approximately 640,000 square meters.
 
The construction of the Puhua project began in June 2010. The whole project, which consists of four phases, is expected to be completed in the third quarter of 2014, with estimated revenues of $700 million. The Company began accepting pre-sale contracts for units in the Puhua Phase One project on October 24, 2009. As of June 30, 2011, the contract revenue for Puhua project is $128 million.
 
 Projects under planning and in process
 
Project Name
 
Type of Projects
 
Estimated Construction Period
 
Estimated
Pre-sale Commencement
 
Total Site Area (m2)
 
Total GFA (m2)
 
Total Number of Units
Baqiao New Development Zone
 
Land
Development
 
2010-
2020
 
N/A
 
N/A
 
N/A
 
N/A
JunJing III
 
Multi-Family residential & Commercial
 
Q4/2010-
 Q1/2012
 
Q3/2011
 
8,094
 
49,636
 
570
Park Plaza
 
Multi-Family residential & Commercial
 
Q2/2011- 
Q4/2014
 
Q4/2011
 
44,250
 
141,822
 
2,000
Golden Bay
 
Multi-Family residential & Commercial
 
Q2/2011-
 Q4/2014
 
Q1/2012
 
146,099
 
252,540
 
N/A
Textile City
 
Multi-Family residential & Commercial
 
Q3/2012- O3/2018
 
Q3/2012
 
433,014
 
630,000
 
N/A
 
Baqiao New Development Zone: On March 9, 2007, we entered into a Shares Transfer Agreement with the shareholders of Xi’an New Land Development Co., Ltd. (“NewLand”), under which the Company acquired 32,000,000 shares of NewLand, constituting 100% equity ownership of NewLand. This acquisition gave the Company the exclusive right to develop and sell 487 acres of land in a newly designated satellite city of Xi’an.

Xi’an has designated the Baqiao District as a major resettlement zone where the city expects 900,000 middle to upper income inhabitants to settle. The Xi’an local government intends to generate a success similar to that created in Pudong, Shanghai, which has resulted in new economic opportunities and provided housing for Shanghai’s growing population.

 
25

 

The Xi’an municipal government plans investments of 50 billion RMB (over $6 billion) in infrastructure in the Baqiao New Development Zone. The construction of a large-scale public wetland park is well underway; it will embellish the natural environment adjacent to China Housing’s Baqiao project.

Through our New Land subsidiary, we sold 18.4 acres to another developer in 2007 and generated about $24.41 million in revenue.
 
In 2008, we established a joint venture with Prax Capital Real Estate Holdings Limited (“Prax Capital”) to develop 79 acres within the Baqiao project, which will be the first phase of the Baqiao project’s development. Prax Capital invested $29.3 million cash in the joint venture. The project is further described in the Puhua section below.

In December 2010, we signed a preliminary contract with the local government with the intention to acquire a 107 acre tract of land for development of a new real estate housing project. The new project is expected to begin in the third quarter of 2011, with an estimated total GFA of 630,000 square meters.

After selling 18.4 acres, placing 79 acres in the joint venture, setting aside approximately 42 acres for the Golden Bay Project, about 348 acres remains available for the Company to develop in the Baqiao project.
 
JunJing III:JunJing III is located near our JunJing II project and the city expressway. It has an expected total GFA of about 49,636 square meters. The project will consist of 3 high rise buildings, each 28 to 30 stories high. The project is targeting middle to high income customers who require a high quality living environment and convenient transportation to the city center. We started construction during the fourth quarter of 2010 and expect to begin recognizing revenue during the third quarter of 2011. The total estimated revenue from this project is about $46 million.

As of June 30, 2011, customers have pledged to purchase $38.2 million JunJing III units. The revenue will be recognized based on percentage of completion upon obtaining all the necessary government permits. In an effort to reduce speculation, the Xi’an government has extended the number of days required to secure the necessary construction permits which has caused the delay of the revenue recognition of Junjing III. The Company has been able to obtain two out of five permits, and expect to obtain the balance of the permits in the third quarter of 2011.

Park Plaza: In July 2009, the Company entered into a Letter of Intent to acquire 44,250 square meters of land in the center of Xi’an for the Park Plaza project. The Company intends to develop a large mid to upper income residential and commercial development project on this site, with an estimated GFA of 141,822 square meters. We anticipated accepting pre-sale purchase agreements in the fourth quarter of 2011, and revenues from pre-sale agreements will begin to be recognized when all revenue recognition criteria have been met. The total revenue from Park Plaza is estimated to be $154 million.

Golden Bay: The Golden Bay project is located within the Baqiao project, with a total GFA of 252,540 square meters. The Golden Bay project will consist of residential buildings as well as a commercial area. We expect to begin accepting presale purchase agreements in the first quarter of 2012.
 
Textile City: The Textile City project is located within the Baqiao New Development Zone. The project consists of residential buildings and a commercial area. Construction is expected to start in the third quarter of 2012, and the entire project will take 5 years.

 Completed Projects with units available for sale

Project name
 
Type of
Projects
 
Completion
Date
 
Total Site
Area
(m2)
 
Total GFA
(m2)
 
Total
Number of
Units
 
Number of
Units sold by
June 30, 2011
JunJing II Phase Two
 
Multi-Family .
residential &
Commercial
    Q2/2011     29,800     121,888   1,015     1,014
JunJing II Phase One
 
Multi-Family
residential &
Commercial
    Q4/2009     39,524     142,214   1,215     1,200
JunJing I
 
Multi-Family
residential &
Commercial
    Q3/2006     55,588     167,931   1,671     1,668

JunJing II Phase Two: The construction of JunJing II Phase Two commenced in the second quarter of 2009 and pre-sales started within the same quarter. As of June 30, 2011, the contract revenue for Phase Two is $ 98.5 million and we have recognized all the contract revenue as the percentage of completion reached 100%.

JunJing II Phase One: We started the construction of JunJing II phase one in the third quarter of 2007 and started the pre-sale campaign in the second quarter of 2007. The project was completed in December 2009 and generated total revenue of $92.7 million.
 
 
26

 
 
TsiningJunJing Garden I: 369 North Jinhua Road, Xi’an. JunJing Garden I was the first German style residential & commercial community in Xi’an, designed by the world-famous WSP architectural design house. Its target customers were local middle income families. The project has 15 residential apartment buildings consisting of 1,671 one to five bedroom apartments. The Garden features secure parking, cable TV, hot water, heating systems and access to natural gas. Total GFA available was 167,931 square meters. JunJing Garden I was also a commercial venture that houses small businesses serving the needs of JunJing Garden I residents and the surrounding residential communities. The project was completed in September 2006.
 
CONSOLIDATED OPERATING RESULTS

Three Months Ended June 30, 2011 Compared With Three Months Ended June 30, 2010

Revenues

Our revenues are mainly derived from the sale of residential and commercial units and buildings, infrastructure work we perform for the local government and land development projects in the Baqiao area. In the second quarter of 2011, most of our revenues came from the Puhua Phase One and Puhua Phase Two projects.
 
Effective January 1, 2008, the Company adopted the percentage of completion method of accounting for revenue recognition for all building construction projects in progress, including the TsiningJunJing II and PuHua Projects. Before that time, the full accrual method was used for all of our residential, commercial and infrastructure projects. Infrastructure projects continue to be accounted for using the full accrual method of accounting.

   
Three months
   
Three months
 
   
ended
   
ended
 
Revenues by project:
 
June 30, 2011
   
June 30, 2010
 
US$
           
Project Under Construction
           
TsiningJunJing II Phase Two (Completed on June 30, 2011)
 
$
-
   
$
21,855,313
 
Puhua Phase One
   
7,703,630
     
8,887,590
 
Puhua Phase Two
   
4,975,580
     
-
 
                 
Projects Completed
               
TsiningJunJing II Phase One
   
193,138
     
3,135,381
 
TsiningJunJing II Phase Two (under construction on June 30, 2010)
 
$
1,988,513
   
$
-
 
TsiningJunJing I
   
672,697
     
1,077,115
 
Tsining-24G
   
-
     
110,835
 
Tsining Gang Wan
   
39,698
     
94,361
 
Tsining In Home
   
-
     
59,791
 
Revenues from the sale of properties
 
$
15,573,256
   
$
35,220,386
 

The following table summarizes details of our most significant projects:
 
   
Three Months 
   
Three Months 
 
     Ended      Ended  
Revenues by project:
 
June 30, 
2011
   
June 30, 
2010
 
US$
           
Project Under Construction
             
Puhua Phase One contract sales
 
$
4,952,039
   
 $
12,022,613
 
Revenue
   
7,703,630
     
8,262,890
 
Total gross floor area (GFA) available for sale
   
139,400
     
139,400
 
GFA sold during the period
   
4,291
     
13,660
 
Remaining GFA available for sale
   
22,928
     
82,046
 
Percentage of completion
   
65.1
%
   
40.8
%
Percentage GFA sold during the period
   
3.1
%
   
9.8
%
Percentage GFA sold to date
   
84
%
   
37.6
%
Average sales price per GFA
 
$
1,154
   
 $
880
 
                 
Puhua Phase Two contract sales
   
 5,686,955
     
2,560,247
 
Revenue
 
$
 4,975,580
   
 $
624,700
 
Total gross floor area (GFA) available for sale
   
 263,191
     
219,746
 
GFA sold during the period
   
6,717
     
4,353
 
Remaining GFA available for sale
   
206,676
     
215,393
 
Percentage of completion
   
40.0
%
   
22.6
 
Percentage GFA sold during the period
   
2.6
%
   
2.0%
 
Percentage GFA sold to date
   
21.4
%
   
2.0%
 
Average sales price per GFA
 
$
847
   
 $
588
 

*Difference in total GFA available for sale is due to addition of a new building

 
27

 

Revenues from projects under construction

Puhua Phase One
 
Puhua Phase One consists of 7 garden houses, 2 mid-rise and 4 high-rise buildings with total expected revenues of approximately $125.8 million. During the second quarter of 2011, we were able to secure $ 5.0 million in contract sales. We also recognized approximately $7.7 million in revenues based on the percentage of completion method.
 
Puhua Phase Two
 
Puhua Phase two has expected revenues of approximately $242.3 million. During the second quarter of 2011, we were able to secure $5.7 million in contract sales. We also recognized approximately $4.7 million in revenues based on the percentage of completion method.

Please note that the method of percentage of completion was utilized to recognize revenue from January 1, 2008. Only revenue for Puhua Phase One and Phase Two is recognized under this method. The percentages of completion of the construction for each building as of June 30, 2011 are shown below:
 
Puhua Phase one
 
Percentage of Completion
 
1#
   
92.83
%
2#
   
95.77
%
3#
   
41.23
%
4#
   
90.86
%
5#
   
43.72
%
6#
   
84.83
%
7#
   
42.08
%
8#
   
76.29
%
9#
   
71.23
%
10#
   
69.52
%
11#
   
40.57
%
12#
   
63.50
%
13#
   
70.86
%

Puhua Phase two
 
Percentage of Completion
 
14#
   
36.73
%
15#
   
40.73
%
16#
   
52.33
%
17#
   
65.18
%
18#
   
36.96
%
19#
   
37.80
%
20#
   
43.89
%
21#
   
38.41
%
22#
   
39.72
%
23#
   
46.79
%
24#
   
32.08
%
 
The above are all the buildings under pre-sale in Puhua Phase One, and Phase Two.
 
 
28

 
 

Revenues from projects completed

The revenue from completed projects totaled $2,894,046 for the three months ended June 30, 2011, compared to $4,477,483 during the same period of 2010. Due to its completion, JunJing II Phase Two was reclassified to completed projects during the second quarter of fiscal 2011.

Other income

Other income includes property management fees, rental income, revenues from the disposal of fixed assets as well as government’s allowance for the equivalent cost of interest on the Company’s investments required to support infrastructure construction, continued river management and suburban planning for the entire Baqiao high-technology industrial park. We recognized $4,678,936 in other income for the three months ended June 30, 2011 compared with $1,373,409 in the same period of 2010. The increase can be explained by the following table which summarizes the breakdown of the other income and the changes during the three months ended June 30, 2011 and 2010:
 
   
For the three months ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
 
Interest income
  $ 46,305     $ 61,547  
Rental income, net
    275,043       530,038  
Income from property management services
    1,000,867       758,532  
Miscellaneous construction contracts
    1,327,770       -  
Gain on disposal of property and equipment
    2,028,951       23,292  
Total
  $ 4,678,936     $ 1,373,409  
 
Cost of properties and land

The cost of properties and land in the three months ended June 30, 2011 decreased 48.8 percent to $13,150,640 compared with $25,691,338 in the same period of 2010. The decrease was primarily a result of the decreased sales in our current selling projects. Due to the completion of the JunJing II Phase Two project, current main selling projects were Puhua Phase One and Phase Two during the second quarter of 2011.

 
29

 
 
Gross profit and profit margin
 
Gross profit for the three months ended June 30, 2011 was $5,113,697, representing a 50.5 percent decrease from $10,325,603 in the same period of 2010. The gross profit margin for the three months ended June 30, 2011 was 25.3 percent compared with 28.2 percent in the same period of 2010. However, the Company’s gross margin from real estate sales was 15.6% during the second quarter of fiscal 2011 compared to 27.1% for the second quarter of fiscal 2010.  In general, the Company’s real estate sales should have an approxitely 25% margin (after business taxes).

The following table summarizes the gross margin (before business taxes) of major projects during the second quarter of fiscal 2011:

 
 
Revenue
(USD)
   
Cost of sales (USD)
   
Gross Margin (USD)
   
% GM
 
JunJing II units
    2,181,651       4,690,254       (2,508,603 )     (115 %)
Puhua Phase 1 and 2
    12,679,210       7,197,224       5,481,985       43 %
 
The following table summarizes the gross margin (before business taxes) of major projects during the second quarter of fiscal 2010:

 
 
Revenue
(USD)
   
Cost of sales (USD)
   
Gross Margin (USD)
   
% GM
 
JunJing II units
    24,990,695       16,099,958       843,123       36 %
Puhua Phase 1 and 2
    7,766,968       5,455,922       2,311,046       30 %

As shown above, the margin of PuHua project is consistent. However, JunJing II had a negative 115% margin which led to an unusually low 16% overall margin on a consolidated basis. The negative margin of JunJing II in the second quarter of fiscal 2011 is due to the completion of the Company’s JunJing II project. Upon completion of the project, following costs previously unknown to the Company were added to the final costs.

 
Ÿ 
The Company agreed to construct additional infrastructures which were not part of the original design of the project for the residents out of good faith and for the sake of good public relations.

 
Ÿ 
Certain government fees were incurred upon completion of the project. The fees initially waived by Xian local government during the construction stage were reinstated during the final inspection of the JunJing II project.

 
Ÿ 
Natural gas connection fees which the company agreed to pay for the residents.

 
Ÿ 
The Company also agreed to pay for additional labour and material cost incurred by subcontractors.
 
The following is a detailed breakdown of the above:

Description (in US dollars)
 
New Q2 2011
 
Reinstated RMB 35 per square meter government fee, originally waived by government.
    1,521,733  
Newly negotiated compensation for labour and material incurred by subcontractors.
    538,544  
New east gate constructed for good faith and public relationship
    260,040  
Misc. repair and maintenance contracts signed
 
19,656 
 
Misc. infrastructure upon completion of Junjing II
    150,918  
Misc. construction upon completion of Junjing II
    54,298  
Natural gas connection fees
    598,814  
Additional costs incurred
    403,134  
         
Total
    3,547,176  
 
These new additional costs were assessed to be changes in estimation and do not affect prior periods.
 

 
30

 
 

Selling, general and administrative expenses

Selling, general and administrative expenses (SG&A) for the three months ended June 30, 2011 decreased 11.6 percent to $3,321,725 from $3,758,565 in the same period of 2010. SG&A accounted for 16.4% of total revenue in the second quarter of 2011 compared to 10.3% for the same period in 2010. The increase in SG&A to total revenue is primarily due to the decrease of revenue.

Stock-based compensation

Stock-based compensation results from the employee stock option plan started in the second quarter of 2011. The plan was intended to serve as incentive to employees. Under the plan, 1,227,755 stock options were granted to the employees of the Corporation. Stock-based compensation in the three months ended June 30, 2011 was $17,820. We incurred no stock-based compensation during the second quarter of 2010.

The 1,227,755 stock options granted on June 13, 2011 have an estimated fair value of $1,316,911 for an average value of $1.04 to $1.10 per stock option using the CRR option pricing model with the following key assumptions:

The Company does not believe any of the options will be forfeited because most of the stock options are granted to long-term employees and officers. In addition, since the performance condition will be set at a reasonably achievable level, the Company believes 100% of the performance conditions can be met.
 
   
June 13, 2011
 
Expected life
 
5.5 – 6.5 years
 
Expected volatility
   
95
%
Risk-free interest rate
   
1.74% - 2.10
%
Dividend yield
   
0
%
 
The expected life of options represents the period of time the granted options are expected to be outstanding. As the Company had not previously granted options, no historical exercising pattern could be followed in estimating the expected life. Therefore, the expected life was estimated as the average of the contractual term and the vesting period. The Company has not paid dividends in the past nor does it expect to pay dividends in the foreseeable future.

Compensation expense for stock options is recognized over the vesting period. During the three months ended June 30, 2011, compensation expense of $17,820 (June 30, 2010 - $Nil) was recognized in the interim condensed consolidated statements of income.
 
Other expenses

Other expenses mainly consist of late delivery settlements and maintenance costs. Other expenses in the three months ended June 30, 2011 was $348,901 compared with $65,381 in the same period of 2010.

 
31

 
 
Operating profit and operating profit margin

Operating profit is defined as gross profit minus operating expenses but before change in fair value of derivatives and income taxes. Operating profit in the three months ended June 30, 2011 was $852,978 compared with $5,708,256 in the same period of 2010, primarily due to the decreased revenues in the second quarter of 2011. The operating profit margin decreased to 4.2 percent for the second quarter of 2011 compared with 15.6 percent for the same period of 2010. The decrease in operating profit margin resulted from reduced revenues, while we had leveled SG&A expenses and interest expenses in the three months ended on June 30, 2011compared with the same period of 2010.

Interest expense

Interest expense in the three months ended June 30, 2011 decreased 18.3 percent to $365,460 from $447,475 in the same period of 2010. The decrease is primarily associated with the decreased employee loan interest.
 
Change in fair value of embedded derivative

The embedded derivative is related to the Company’s $20 million Convertible Debt offering completed in January 2008. The change in the fair value of embedded derivatives was a periodic adjustment to the estimated cost to the Company which was provided by the Cox-Ross-Rubinstein Binomial Lattice valuation model (CRR model)

The CRR model depends on the following assumptions: the Company’s common stock price underlying the warrants; strike price; conversion price; expected life; expected volatility; risk free interest rate; and dividend rate. During the second quarter of 2011, our common stock price experienced large fluctuations with the price decreasing from $1.90 on April 1, 2011 to $1.40 on June 30, 2011. The decrease in stock price and expected volatility caused a decrease in fair value for warrants and the change of fair value was booked as a reverse of non-cash expense.
 
The company recorded $(409,478) in the change in fair value of embedded derivatives in the three months ended June 30, 2011 compared with $(1,307,129) in the same period of 2010.

Change in fair value of warrants

In 2006, 2007 and 2008, the Company issued warrants in conjunction with the issuance of common shares or Convertible Debt. The warrants permit the investors to buy additional common shares at the prices specified in the warrant agreements.

An investor typically only exercises a warrant to buy common shares when the stock price is higher than the warrant exercise price. The investor pays the exercise price and the Company covers the difference between the warrant exercise price and the share price at the time of conversion.

In addition, the Company was required to estimate the fair value of its remaining warrants outstanding and adjust the value as appropriate, and it chose to use the Cox-Ross-Rubinstein Binomial Lattice valuation model to estimate their fair value.

The change in fair value of warrants was $(263,623) in the three months ended June 30, 2011, compared to $(2,242,663) during the same period of 2010, which consisted of the periodic adjustment to the estimated cost to the company to provide the common shares, assuming that all of the warrants will be exercised sometime in the future. The basis for estimating the cost to provide the common shares was provided by the valuation model. The CRR model depends on the following assumptions: the Company’s common stock price underlying the warrants; strike price; expected life; expected volatility; risk free interest rate; and dividend rate. During the second quarter of 2011, our common stock price experienced large fluctuations with the price decreasing from $1.90 on April 1, 2011 to $1.40 on June 30, 2011. The decrease in stock price and expected volatility caused a decrease in fair value for warrants and the change of fair value was booked as a reverse of non-cash expense. While During the second quarter of 2010, our common stock price experienced large fluctuations with the price decreasing from $3.76 on April 1, 2010 to $2.32 on June 30, 2010. The decrease in stock price and expected volatility caused a decrease in fair value for warrants and the change of fair value was booked as a reverse of non-cash expense.
 
Provision for income taxes

The $985,101 provision for income taxes for the three months ended June 30, 2011 decreased from $1,531,461 for the three months ended June 30, 2010 due to decrease in net income from business operations.
 
Net income

Net income for the three months ended June 30, 2011 decreased 89.6 percent to $574,900 compared to $5,567,946 in the same period of 2010. The decrease in net income was mainly due to reduced total revenue and increased SG&A expense to total revenue.
 
The periodic revaluation of derivatives and warrants also contributed approximately $0.7 million during the quarter mainly due to the decrease of our common stock price.
 
 
32

 
 
Charge to noncontrolling interest
 
The Company had no such cost during the second quarter of 2011.

Basic and diluted earnings per share

Basic earnings per share was $0.02 in the three months ended June 30, 2011, compared to $0.17 in the same period of 2010. Diluted earnings per share was $0.01 in the three months ended June 30, 2011, compared to $0.13 in the same period of 2010. The number of shares outstanding doesn’t change significantly from year to year. Earnings available to distribute decreased to $ 0.6 million in the second quarter of 2011 from $5.6 million in the second quarter of 2010.
 
Common shares used to calculate basic and diluted EPS

The weighted average shares outstanding used to calculate basic earnings per share was 35,078,639 shares in the three months ended June 30, 2011 and 33,065,086 shares in the same period of 2010. The weighted average shares outstanding used to calculate the diluted earnings per share was 36,694,348 shares in the three months ended June 30, 2011 and 35,302,785 shares in the same period of 2010.

Foreign exchange

The company operates in China and the functional currency is Chinese Renminbi (RMB) but the reporting currency is the U.S. dollar, based on the exchange rate of the two currencies. The fluctuation of exchange rates during the three months ended June 30, 2011 and the same period of 2010, when translating the operating results and financial positions at different exchange rates created the accrued gain (loss) on foreign exchange. The gain on foreign exchange in the three months ended June 30, 2011 was $1,721,118, compared with a gain of $834,531 in the same period of 2010.
 
Six Months Ended June 30, 2010 Compared With Six Months Ended June 30, 2010

Revenues

Our revenues are mainly derived from the sale of residential and commercial units and buildings, infrastructure work we perform for the local government and land development projects in the Baqiao area.

In the six months ended June 30, 2011, most of our revenues came from Puhua Phase One and Puhua Phase Two project.
 
   
6 months
   
6 months
 
   
ended
   
ended
 
Revenues by project:
 
June 30, 2011
   
June 30, 2010
 
US dollars
           
Project Under Construction
           
TsiningJunJing II Phase Two (completed on June 30, 2011)
 
$
-
   
$
37,017,035
 
PuhuaPhase One
   
12,923,359
     
19,717,454
 
PuhuaPhase Two
   
13,404,060
     
624,700
 
                 
Projects Completed
               
TsiningJunJing II Phase Two
   
 6,163,029
         
TsiningJunJing II Phase One
   
1,273,773
     
7,230,906
 
TsiningJunJing I
   
 672,697
     
2,373,840
 
Tsining-24G
   
695,439
     
126,519
 
Tsining Gang Wan
   
97,716
     
 94,361
 
Tsining In Home
   
-
     
426,632
 
Additional Project
               
Revenues from the sale of properties
 
$
35,230,073,
   
$
67,611,447
 
 
 
33

 
 
Revenues from the sale of properties

The revenues from the sale of properties in the six months ended June 30, 2011 decreased 47.9 percent to $35,230,073 from $67,611,447 in the same period of 2010. The decrease was primarily due to the completion of JunJing Two Phase Two during the second quarter of 2011. As a result, the active projects under selling were only Puhua Phase Two and Phase One.

The following table summarizes details of our most significant projects:

   
6 Months 
   
6 Months 
 
     Ended      Ended  
Revenues by project:
 
June 30, 2011
   
June 30, 2010
 
US$
           
Project Under Construction
         
-
 
Puhua Phase One Project contract sale
 
$
10,102,606
     
29,902,736
 
Revenue
   
12,923,358
     
19,717,454
 
Total gross floor area (GFA) available for sale
   
139,400
     
139,400
 
GFA sold during the period
   
7,956
     
39,401
 
Remaining GFA available for sale
   
22,928
     
87,046
 
Phase one percentage of completion
   
65.1
     
40.8
 
Percentage GFA sold during the period
   
5.7
     
28.3
 
Percentage GFA sold to date
   
84
     
37.6
 
Average sales price per GFA
 
$
1,270
     
760
 
                 
Puhua Phase Two Project contract sales
   
24,454,216
     
2,560,248
 
Revenue
 
$
13,404,060
     
624,700
 
Total gross floor area (GFA) available for sale
   
263,191
     
219,746
 
GFA sold during the period
   
28,701
     
4,353
 
Remaining GFA available for sale
    206,676      
215,393
 
Percentage of completion
   
40.0
     
22.6
 
Percentage GFA sold during the period
   
10.9
     
2.0
 
Percentage GFA sold to date
   
21.4
     
2.0
 
Average sales price per GFA
 
$
852
     
588
 

Revenues from projects under construction

Puhua Phase One and Phase Two

Puhua Phase One consists of 7 garden houses, 2 mid-rises and 4 high-rises buildings with total expected revenues of approximately $126.8 million. Puhua Phase Two consists of 11 mid-rises and high-rises. The pre-sale of Phase One began in the fourth quarter of 2010 and we were able to secure $10.2 million in contract sales for the 6 months ended June 30, 2011 of which we recognized approximately $13.0 million for the 6 months ended June 30, 2011. For Phase Two we were able to secure $24.7 million in contract sales for the 6 months ended June 30, 2011. We also recognized approximately $13.4 million in revenues based on the percentage of completion method.

Revenues from projects completed

The revenue from completed projects totaled $8,902,655 for the six months ended June 30, 2011, compared to $10,252,257 during the same period of 2010. Due to its completion, JunJing II Phase Two was reclassified to completed projects during the second quarter of fiscal 2011.
 
 
34

 
 
Other income

Other income includes property management fees, rental income, revenues from the disposal of fixed assets as well as government’s allowance for the equivalent cost of interest on the Company’s investments required to support infrastructure construction, continued river management and suburban planning for the entire Baqiao high-technology industrial park. We recognized $7,579,815 in other income for the six months ended June 30, 2011 compared with $2,555,262 in the same period of 2010. The 197 percent increase can be explained by the following table which summarizes the breakdown of the other income and their changes during the six months ended June 30, 2011 and 2010:
 
   
For the six months ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
 
Interest income
 
$
85,131
   
$
178,093
 
Rental income, net
   
862,320
     
840,938
 
Income from property management services
   
1,832,067
     
1,512,939
 
Miscellaneous construction contracts
   
2,763,194
     
-
 
Gain on disposal of property and equipment
   
2,037,103
     
23,292
 
 Total
 
$
7,579,815
   
$
2,555,262
 

Cost of properties and land

The cost of properties and land in the six months ended June 30, 2011 decreased 46.8 percent to $27,789,214 compared with $52,253,225 in the same period of 2010. The decrease was primarily a result of reduced sales volume during the period. The sales of our JunJing II Phase Two project were completed in the second quarter of 2011. As a result, we had only Puhua Phase One and Phase Two available for sale during the second quarter of 2011, which led to decreased sales volume.

Gross profit and profit margin

Gross profit for the six months ended June 30, 2011 was $10,836,250, representing a decrease of 35.5 percent from $16,799,857 in the same period of 2010. The gross profit margin for the six months ended June 30, 2011 was 25.3 percent compared with 23.9 percent in the same period of 2010. The improved market conditions resulted in an increase in average selling price for all of our projects, which led to an improved gross profit margin. Meanwhile, during the first quarter of 2010, the sales of low margin parking lots also lowered our gross margin for the six months ended June 30, 2010.
 
 
35

 
 
Selling, general and administrative expenses

Selling, general and administrative expenses (SG&A) for the six months ended June 30, 2011 increased 7.3 percent to $6,754,441 from $6,296,449 in the same period of 2010. The increase in SG&A is primarily due to the increased expenses associated with new projects to be constructed in the near future and increased audit expense associated with SOX compliance. Employee salary increases also contributed to the increased administrative expenses. SG&A accounted for 15.8 percent of total revenue for the six months ended June 30, 2011 compared to 9.0 percent for the same period in 2010. 

Stock-based compensation

Stock-based compensation results from the employee stock option plan started in the second quarter of 2011. The plan was intended to serve as incentive to employees. Under the plan, 1,227,755 stock options were granted to the employees of the Corporation.
 
Stock-based compensation in the six months ended June 30, 2011 was $17,820. We incurred no stock-based compensation during the same period of 2010.

The 1,227,755 stock options granted on June 13, 2011 have an estimated fair value of $1,316,911 for an average value of $1.04 to $1.10 per stock option using the CRR option pricing model with the following key assumptions:

The Company does not believe any of the options will be forfeited because most of the stock options are granted to long-term employees and officers. In addition, since the performance condition will be set at a reasonably achievable level, the Company believes 100% of the performance conditions can be met.
 
   
June 13, 2011
 
Expected life
 
5.5 – 6.5 years
 
Expected volatility
   
95
%
Risk-free interest rate
   
1.74% - 2.10
%
Dividend yield
   
0
%
 
The expected life of options represents the period of time the granted options are expected to be outstanding. As the Company had not previously granted options, no historical exercising pattern could be followed in estimating the expected life. Therefore, the expected life was estimated as the average of the contractual term and the vesting period. The Company has not paid dividends in the past nor does it expect to pay dividends in the foreseeable future.

Compensation expense for stock options is recognized over the vesting period. During the three months ended June 30, 2011, compensation expense of $17,820 (June 30, 2010 - $Nil) was recognized in the interim condensed consolidated statements of income.
 
Other expenses

Other expenses consist mainly of late delivery settlements and maintenance costs. Other expenses in the six months ended June 30, 2011 increased to $390,478 compared with $188,032 in the same period of 2010.

Operating profit and operating profit margin

Operating profit is defined as gross profit minus operating expenses but before change in fair value of derivatives and income taxes. Operating profit in the six months ended June 30, 2011 was $2,167,099 compared with $8,685,768 operating profit in the same period of 2010, primarily due to the reduced revenue during the six months ended June 30, 2011. The operating profit margin was 5.1 percent for the six months ended June 30, 2011 compared with 12.4 percent for the same period of 2010, primarily due to the increased SG&A during the period.

 
36

 
 
Interest expense

Interest expense in the six months ended June 30, 2011 increased 0.8 percent to $962,608 from $954,500 in the same period of 2010. This increase was primarily due to the increase of employee loan interest.

Change in fair value of embedded derivative

The embedded derivative is related to the Company’s $20 million Convertible Debt offering completed in January 2008. The change in the fair value of embedded derivatives was a periodic adjustment to the estimated cost to the Company, which was provided by the Cox-Ross-Rubinstein Binomial Lattice valuation model (CRR model).
 
The CRR model depends on the following assumptions: the Company’s common stock price underlying the warrants; strike price; conversion price; expected life; expected volatility; risk free interest rate; and dividend rate. During the six months ended on June 30, 2011, our common stock price experienced large fluctuations with the price decreasing from $2.74 on December 31, 2010 to $1.40 on June 30, 2011. The decrease in stock price and expected volatility caused a decrease in fair value for warrants and the change of fair value was booked as a reverse of non-cash expense.

The company recorded $(1,462,232) in the change in fair value of embedded derivatives in the six months ended June 30, 2011 compared with $(1,873,335) in the same period of 2010.
 
Change in fair value of warrants

In 2006, 2007 and 2008, the Company issued warrants in conjunction with the issuance of common shares or Convertible Debt. The warrants permit the investors to buy additional common shares at the prices specified in the warrant agreements.

An investor typically only exercises a warrant to buy common shares when the stock price is higher than the warrant exercise price. The investor pays the exercise price and the Company covers the difference between the warrant exercise price and the share price at the time of conversion.

In addition, the Company was required to estimate the fair value of its remaining warrants outstanding and adjust the value as appropriate, and it chose to use the Cox-Ross-Rubinstein Binomial Lattice valuation model to estimate their fair value.

The change in fair value of warrants was $(1,114,274) in the six months ended June 30, 2011, compared to $(2,797,264) during the same period of 2010, which consisted of the periodic adjustment to the estimated cost to the company to provide the common shares, assuming that all of the warrants will be exercised sometime in the future. The basis for estimating the cost to provide the common shares was provided by the valuation model. The CRR model depends on the following assumptions: the Company’s common stock price underlying the warrants; strike price; expected life; expected volatility; risk free interest rate; and dividend rate. During the six months ended on June 30, 2011, our common stock price experienced large fluctuations with the price decreasing from $2.74 on December 31, 2010 to $1.40 on June 30, 2011. The decrease in stock price and expected volatility caused a decrease in fair value for warrants and the change of fair value was booked as a reverse of non-cash expense.

Provision of income taxes
 
The income tax decreased from $2,540,992 for the six months ended June 30, 2010 to $1,771,590 for the six months ended June 30 is due to the decrease of net income from business operations.

Net income

Net income for the six months ended June 30, 2011 decreased 65 percent to $3,043,983 compared to $8,685,880 in the same period of 2010. The decrease in net income was mainly due to reduced total revenue, and increased SG&A expense; however, the decrease was partly offset by increased gross margin.

The periodic revaluation of derivatives and warrants also contributed approximately $2.6 million during the period mainly due to the decrease of our common stock price.
 
 
37

 
 
Charge to non-controlling interest
 
On November 5, 2008, the Company and Prax Capital (“Prax”) entered into a joint venture agreement to develop 79 acres within China Housing’s Baqiao project located in Xi’an. Prax invested $29.3 million for a 25% interest in Puhua through obtaining 1,000 Class A shares of Success Hill (“Class A Shares”) with various distribution rights. Prax’s initial investments were recorded as non-controlling interests in the consolidated financial statements. During the first quarter of 2010, the Company proposed to redeem Prax’s 1000 Class A shares in Success Hill in order to fix the maximum return on Prax’s initial investment. Both parties then entered into an Amended and Restated Shareholders’ Agreement on May 10, 2010, under the terms of which, effective January 1, 2010, the Company will redeem all Prax’s Class A Shares within three years for consideration of the USD equivalent of $84.39 million (RMB 576 million).

As Prax’s interest in the consolidated subsidiaries meets the definition of a mandatorily redeemable financial instrument, it is reported within liabilities as mandatorily redeemable non-controlling interests in subsidiaries on the Company’s consolidated balance sheet and initially measured at the fair value of cash that would be due and payable to Prax under the Amended and Restated Shareholder agreement.

As of January 1, 2010, the Company recorded a liability of $42,600,511 reflecting the fair value of the redemption amount of Prax’s interest under the Amended and Restated Shareholder Agreement and eliminated the original non-controlling interest in the equity on the consolidated balance sheet. The difference of $14,229,043 between the carrying value of the original non-controlling interest and the fair value of redemption amount has been reflected as a charge to non-controlling interest.
 
The Company had no such cost during the six month ended June 30, 2011.

Basic and diluted earnings per share
 
Basic earnings per share was 0.09 in the six months ended June 30, 2011, compared to $(0.17) in the same period of 2010. Diluted earnings per share was $0.05 in the six months ended June 30, 2011, compared to $(0.20) in the same period of 2010. The number of shares outstanding doesn’t change significantly from year to year. Earnings available to distribute increased from $(5.5) million for the 6 months ended June 30, 2010 to $3.0 million in the same period 2011. The negative EPS and Diluted EPS in 2010 were mainly due to Prax restructuring which resulted in the recording of a one-time loss of $14,229,043.

Common shares used to calculate basic and diluted EPS

The weighted average shares outstanding used to calculate basic earnings per share was 34,485,897 shares in the six months ended June 30, 2011 and 32,824,416 shares in the same period of 2010. The weighted average shares outstanding used to calculate the diluted earnings per share was 36,101,606 shares in the six months ended June 30, 2011 and 34,752,732 shares in the same period of 2010.

Foreign exchange

The company operates in China and the functional currency is Chinese Renminbi (RMB) but the reporting currency is the U.S. dollar, based on the exchange rate of the two currencies. The fluctuation of exchange rates during the six months ended June 30, 2011 and the same period of 2010, when translating the operating results and financial positions at different exchange rates, created the accrued gain (loss) on foreign exchange. The gain on foreign exchange in the six months ended June 30, 2011 was $3,083,989, compared with $806,847 in the same period of 2010.

Cash flow discussion

There is net cash inflow of $24,270,216 during the six months ended June 30, 2011 compared with $31,020,859 cash intflow during the same period of 2010.
 
Operating activity cash inflow was $6,442,484 in the six months ended June 30, 2011, compared with operating cash inflow of $16,315,586 in the same period of 2010 due to the sales of the property.

There was a cash outflow of $3,289,424 for investing activities for the six months ended June 30, 2011, compared with investing cash outflow of $1,042,100 for the same period of 2010, due to the purchase of the property and equipment.

There was a cash inflow of $21,117,156 for financing activities for the six months ended June 30, 2011 compared with $15,747,373 of financing cash intflow in the same priod of 2010 due to the additional bank loans drawn. 

 
38

 

Debt leverage

Total debt consists of Payables for acquisition of businesses, Loans from employees, Loans payable, Convertible Debt and mandatorily redeemable noncontrolling interests in Subsidiaries.

Total debt outstanding as of June 30, 2011 was $167.0 million compared with $143.9 million on December 31, 2010. Net debt outstanding (total debt less cash) as of June 30, 2011 was $54.2 million compared with $62.3 million on December 31, 2010. The company's net debt as a percentage of total capital (net debt plus shareholders' equity) was 31.5 percent on June 30, 2011 and 38.0 percent on December 31, 2010 which mainly resulted from additional bank and employee loans.

Liquidity and capital resources

Our principal liquidity demands are based on the development of new properties, property acquisitions, and general corporate purposes. As of June 30, 2011, we had $72,693,792 of cash and cash equivalents, compared to $46,904,161 as of December 31, 2010, an increase of $25,789,631. Along with progress in projects, we can use the internally generated cash flow to fund daily operations.

The Company leases part of its office and land for self-use under various operating lease agreements with expiry dates between the years 2010 and 2041.
 
The Company is also committed to acquire Shaanxi Bihu Property Development Co., Limited (“Bihu”). The remaining related purchase price to be paid within one year is approximately $9.5 million.
 
The Company also had various commitments related to land use right acquisition with unpaid balances of approximately $20.0 million. The balances are not due until the vendor removes the existing building on the land and changes the zoning status of the land use right certificate. Based on the current condition, the Company estimates that the balances will be paid in two years.

All future payments required under the various agreements are summarized below.

   
Payment due by period
 
Commitments and Contingencies
 
Total
 
Less than
1 year
 
1-2 years
   
2-3 years
   
3-4 years
   
4-5 years
   
After
5 years
 
Operating leases
   
$
3,037,815
   
$
190,487
   
$
143,695
   
$
143,695
   
$
146,836
   
$
146,836
   
$
2,266,266
 
Acquisition (note 19)
     
9,545,912
     
9,545,912
     
-
     
-
     
-
     
-
     
-
 
Land use rights
     
19,749,955
     
19,749,955
     
-
     
-
     
-
     
-
     
-
 
Total
   
$
32,333,682
   
$
29,486,354
   
$
143,695
   
$
143,695
   
$
146,836
   
$
146,836
   
$
2,266,266
 
 
Financial obligations

The loans payable balances were secured by certain of the Company’s real estate held for development or sale with a carrying value of $102,752,690 at June 30, 2011 (December 31, 2010 - $89,538,930) and certain buildings and income producing properties and improvements with a carrying value of $1,886,795 at June 30, 2011 (December 31, 2010 - $4,458,389). The weighted average interest rate on loans payable as at June 30, 2011 was 6.7% (December 31, 2010 – 5.5%).
 
The loans payable were also secured by certain real estate units sold to customers. The Company obtained consent from these customers that the Company does not have to remove the mortgage on such apartments or to register the transfer of the ownership of such apartments by the Company to the customers for the time being.

 
39

 
 
Loans payable

Bank loans represent amounts due to various banks. These loans generally can be renewed with the banks when they expire. Bank loans as of June 30, 2011 and December 31, 2010 consisted of the following:
 
   
June 30,
2011
   
December 31,
2010
 
                 
Xi’an Rural Credit Union Zao Yuan Rd. Branch
               
Due July 2, 2011, annual interest is at 8.496 percent, secured by the Company’s Jun Jing Yuan I, Han Yuan and XinXing Tower projects
   
2,784,869
     
2,727,273
 
                 
Xinhua Trust Investments Ltd.
               
Due February 10, 2012, annual interest is at 10 percent, secured by the 24G project
   
23,207,240
     
22,727,273
 
                 
Commercial Bank Weilai Branch
               
Annual interest is prime with a 30% increase, secured by the Company’s Jun Jing Yuan II Building Number 12 $309,430 is payable on August 29, 2011; $773,575 is payable on March 31, 2012; $773,575 is payable on June 30, 2012; and $618,859 is payable on July 23, 2012
   
2,475,439
     
4,090,909
 
                 
Bank of Beijing, Xi’an Branch
               
Due December 10, 2012, annual interest is at the prime rate of People’s Bank of China (6.31%) secured by the PuHua project with a minimum repayment of $7.6 million  required by December 31, 2011.
   
15,471,494
     
22,727,273
 
                 
Xi’an Duqu Trust Bank
               
Due June 11, 2011, annual interest is at 9.18 percent, secured by the Company’s Junjing Yuan I properties
   
-
     
681,817
 
                 
JP Morgan International Bank Limited Brussels Branch
               
Due December 14, 2011, annual interest is at 1.2 percent, secured by a $34,656,146 restricted cash
   
30,016,529
     
30,016,529
 
                 
Tianjin Cube Equity Investment Fund Partnership
               
Due December 10, 2012, annual interest is 9.6 percent, secured by JunJing Yuan II Commercial Units
   
30,942,988
     
-
 
                 
Total
 
$
104,898,559
   
$
82,971,074
 
 
All loans are used to finance construction projects. All interest paid was capitalized and allocated to various real estate construction projects.
 
 
40

 
 
 
Liquidity expectation

The Company believes that the combination of present capital resources, internally generated funds, and unused financing sources are more than adequate to meet cash requirements for the year 2011.

We intend to meet our liquidity requirements, including capital expenditures related to the purchase of land for the development of our future projects, through cash flow provided by operations and additional funds raised by future financings. Upon acquiring land for future developments, we intend to raise funds to develop our projects by obtaining mortgage financing mainly from local banking institutions with which we have done business in the past. We believe that our relationships with these banks are in good standing and that our real estate will secure the loans needed. We believe that adequate cash flow will be available to fund our operations.

The majority of the company's revenues and expenses were denominated primarily in Renminbi (RMB), the currency of the People's Republic of China. There is no assurance that exchange rates between the RMB and the U.S. dollar will remain stable. The company does not engage in currency hedging. Inflation has not had a material impact on the company's business.

 
41

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is subject to the following market risks, including but not limited to:

General Real Estate Risk
 
There is a risk that the Company’s property values could go down due to general economic conditions, a weak market for real estate generally, or changing supply and demand. The Company’s property held for sale value, approximately $136.5 million at the end of June 30, 2011, may change due to market fluctuations. Currently, it is valued at our cost which is significantly below the market value.
 
Risk Relating to Property Sales

The Company may not be able to sell a property at a particular time for its full value, particularly in a poor market.

Foreign Currency Exchange Rate Risk
 
The Company conducts all of its business in the People’s Republic of China. All revenue and profit are denominated in RMB. When the RMB depreciates, it may adversely affect the Company’s financial performance.
 
Item 4. Controls and Procedures

(a)     Evaluation of Disclosure Controls and Procedures.
 
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)). Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are effective.
 
(b)     Changes in Internal Control over Financial Reporting.

During the quarter ended June 30, 2011, there was no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 
42

 

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors.

We have no material changes to the risk factors previously disclosed in our Form 10-K, as amended, for the year ended December 31, 2010.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Removed and Reserved)
 
Item 5. Other Information

None.
 
Item 6. Exhibits

(a) Exhibits
 
Exhibit
   
Number
 
Description of Exhibit
31.1
 
Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
     
31.2
 
Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended
     
32.1
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)
     
32.2
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer)

 
43

 
 
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
China Housing & Land Development, Inc.
 
       
August 15, 2011
By: 
/s/ Xiaohong Feng  
   
Xiaohong Feng
 
   
Chief Executive Officer
(Principal Executive Officer)
 
 
August 15, 2011
By: 
/s/ Cangsang Huang  
   
Cangsang Huang
 
   
Chief Financial Officer
(Principal Financial and Accounting Officer)
 
 
 
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